In September 2005, just days after their first son was born, Oswaldo Castaneda and Maria Lopez Araiza say they received a phone call from the Children’s Education Funds Inc. (CEFI). A sales representative, they recall, told them about the company’s group Registered Education Savings Plans (RESPs) and how they’d help them save up for their newborn child’s higher education costs.
“He was very pleasant and spoke Spanish, which made us feel better,” Castaneda and Araiza, who are originally from Peru and Mexico, respectively, told Global News. “Everything sounded really good, so we signed up.”
When their second son arrived in 2008, the couple say they received a similar call from CEFI and opened another account. Over the years, the couple says they diligently put money into both accounts, although they say they sought to freeze automatic deposits into the accounts in 2016.
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But Castaneda and Araiza, who are based in Toronto but often live abroad for extended periods running their international furniture company, admit they didn’t take a close look at their account statements until a few years ago.
When Araiza started sifting through the paperwork, she was “shocked” to see that the two RESPs were earning only modest investment returns despite the hefty fees charged by CEFI. She then discovered the possibility of investing within RESPs offered by banks and other financial institutions at much lower fees.
In February, the couple say they started inquiring with CEFI about moving both accounts to one of Canada’s big banks. CEFI disputes this account, saying it only received a formal request to move the funds to an another financial institution on Nov. 4. The transfer finally occurred on Nov. 28, 15 business days after receipt of the request and one day after Castaneda emailed the company to advise it that Global News would be contacting it.
Global News has reviewed email exchanges between the couple and the company indicating that discussions about transferring out the money date back to at least June.
After contributing approximately $49,000, Castaneda and Araiza are walking away with around $12,000 in government grants tied to their RESP contributions, as well as a meagre $12,500 in investment income earned on both grants and contributions.
The couple has also been charged $11,400 in fees, a sum which almost offsets the investment returns the accounts earned in over 12 years.
They say they feel cheated.
“They charged us like a credit card [company] for holding our own money,” Castaneda said.
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Group RESPs aren’t like other RESPs
When Global News contacted CEFI about Castaneda and Araiza’s file, the company said the charges are in accordance with policies outlined in its prospectus.
In a group RESP, offered by so-called scholarship plan dealers like CEFI, parents buy shares — called units — of the plan, which is usually based on the child’s birth date. There are often steep fees and a set schedule for contributions. Generally, families get their money back — along with applicable government grants and investment returns — at maturity, provided their child attends a qualifying higher education institution.
If parents miss a payment, plan dealers may charge a penalty and interest on the missed contribution, according to information provided by the Ontario Securities Commission. They may also terminate the account, which may result in the family losing all or some of their investment earnings.
Parents also risk losing their investment earnings if they withdraw from the plan early. Those who stay in the plan until maturity, on the other hand, may share in the earnings of families who dropped out.
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In Castaneda and Araiza’s case, CEFI told Global News that the couple had been paying fees of approximately $1,000 a year for both accounts for over a decade. Those charges would have grown smaller if the couple had remained in the group plan for its full life of 17 years, the plan dealer added.
CEFI added that Castaneda and Araiza’s fees also include interest charges worth approximately $1,450 that were applied after the couple missed some payments.
Those charges served to compensate other plan members for the loss of interest income due to the missing contributions, CEFI said.
CEFI said it did not receive any instructions from the couple to freeze the automatic withdrawals in 2016. Instead, it maintains that the pair’s annual contribution in October 2016 was rejected due to non-sufficient funds. Later, according to the company’s account, Araiza contacted it to change the deposit method from automatic withdrawal to cheque and indicated her intention to make up the missed contribution but failed to do so.
The couple rejects this version of the events, saying that CEFI ignored their request to halt automatic withdrawals. They also deny ever asking for a change of payment method.
CEFI told Global News that Castaneda and Araiza might have seen the fees potentially refunded as part of discretionary top-ups that the plan distributes when children are attending post-secondary institutions. Annual discretionary payments handed out by CEFI in recent years range from $75 to $146 per unit per year, which may work out to several thousand dollars per student for a four-year course of study, according to data the company shared with Global News.
“Had the couple kept their Group Option Plans at CEFI, we believe that we would have achieved a satisfactory outcome,” CEFI also said.
Castaneda and Araiza were allowed to retain their investment earnings by initially turning both group RESP accounts into individual RESP accounts at CEFI and then transferring the funds to an outside bank. The company warned them they would lose around $8,500 in investment returns for both children by moving the money directly from the group plan to a bank.
“Once CEFI became aware that the couple had made their minds up to transfer out to a bank, we worked with them to preserve their investment income,” the company told Global News via email.
That investment income, however, was almost completely offset by fee charges.
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‘The government is allowing these companies to do so much harm’
Castaneda and Araiza say they weren’t thinking clearly when they signed on to CEFI’s group RESP plans.
“My wife was breastfeeding still and recovering from birth,” Castaneda recalled of the time the couple received the first call from the sales representative. “And I was very tired of the nights that were cut short due to our baby crying.”
CEFI told Global News the couple had 60 days from signing the RESP applications to cancel the plan and receive a full refund of the amount invested. “This is made very clear in the disclosure that the couple were given at the time of sale,” it said.
The company also noted the pair signed up for one of its plans again in 2008, when their second child was born.
Still, Castaneda and Araiza fit the profile of those targeted by scholarship plan dealers, according to general information shared with Global News by the Ontario Securities Commission (OSC), which oversees plan dealers registered in the province.
Group plans are “often aggressively sold, including to vulnerable investors who have little investing experience or who may not be fluent in English or French, the languages in which they are generally sold here in Canada,” the OSC told Global News in an emailed statement.
The regulator described the plans as “an area of focus for the OSC, especially given their complexity and their long investment horizons.”
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CEFI said its code of contact for sales representatives “prohibits high pressure sales tactics absolutely.” It added that when one of its plans is not sold in one of Canada’s official languages, it takes additional steps to ensure that the product is fully presented in the other language – “including all plan risks, fees and benefits.”
“The couple have not raised concerns with high pressure sales tactics or language with CEFI. At no point during the time that the couple were CEFI subscribers did CEFI have indication that the couple were vulnerable investors,” it added.
“CEFI is proud to serve Canada’s diverse multicultural community,” the company told Global News.
Eric Arnold, CEO of Planswell, a Canadian Fintech startup that offers free online financial plans, says his company often advises clients against moving money out of group RESPs before maturity.
Once you’ve been in such a plan for many years, he said, the best course of action is usually to hold on until maturity. Withdrawing, he said, usually results in thousands of dollars in fees.
Some 80,000 Canadian families per year sign on to a group RESP plan, and 40 per cent of participants do not make it until the end, Arnold told Global News citing Planswell research.
“It’s tragic,” he said.
Families often find that they can’t keep up with the contributions schedule when emergencies or unexpected circumstances crop up, he added.
But fees and penalties are only part of the problem. Generally, plan dealers also aren’t investing as aggressively as they should be given their long-term horizons, Arnold said.
Low-risk investments are generally associated with lower returns.
Castaneda and Araiza told Global News disappointing returns were one of the main reasons for their decision to withdraw from the plan.
As of the end of 2017, around 70 per cent of the investment mix for group RESP at CEFI was made up of bonds, according to the company’s website.
CEFI says its objective is to maximize long-term growth while “ensuring the preservation” of plan members’ savings. The company also says on its website that pooling funds with other families let members benefit from professional investment management fees at lower cost.
The OSC’s web page on group RESP advises consumers to read and understand the prospectus that every scholarship plan dealer is required to provide. It also cautions against fees, penalties and the possibility of additional rules about how much and how often group plans will distribute the money at maturity.
In 2013, the regulator introduced new disclosure requirements for scholarship plans designed to help investors understand the benefits and risks of group plans.
“We have conducted numerous compliance reviews over the last 15 years of scholarship plan dealers registered in Ontario,” OSC also told Global News via email. “Where we have uncovered compliance deficiencies, we have taken regulatory action (including, in appropriate cases, enforcement action) to remediate these issues.”
Consumers who have not been able to resolve a complaint with a plan dealer can also turn to the Ombudsman for Banking Services and Investments (OBSI).
“We will speak to both the consumer and firm, gather the relevant information and conduct an impartial investigation,” OBSI told Global News via email. “If the case relates to disclosure, for example, we will gather the relevant documentation and any correspondence between the firm and consumer to see if the information relating to the investment’s features and fees was communicated accurately and clearly.”
In 2017, OBSI closed 35 cases based on complaints against scholarship plan dealers, 13 of which were in favour of the consumer. Eight of those cases were against CEFI, two of which were resolved in favour of the complainant, according to OBSI.
In correspondence reviewed by Global News, CEFI advised Castaneda and Araiza of the possibility to file a complaint with OBSI. The couple said it hasn’t had time yet to properly review the option.
Still, Araiza is wondering why Canada doesn’t have rules that would prevent firms from charging such high fees in the first place.
“The government is allowing these companies to do so much harm.”