Are you paying too much for your 529 college savings plan? If you’ve bought through a broker or adviser, the answer is almost certainly yes. Every state has a “direct-sold” plan that you can access through a website, without paying any commissions, so it has always mystified me why some parents and grandparents pay extra to get virtually the same access to tax-free college savings plans.
Individual states run their own plans, and typically offer both broker-sold and direct-sold plans. Direct-sold plans always have the lowest costs, since there is no broker or adviser to be compensated. Both types of plans have similar funds, typically age-based options as well as individual mutual funds. However, broker-sold plans include up-front commissions and higher ongoing management fees for each fund, depending on the class of shares they recommend to investors in the plan.
Now, in the face of overwhelming evidence that many brokers are recommending expensive and inappropriate share classes within the plans they sell, FINRA, the industry self-regulatory organization, is giving firms 60 days to identify — and rapidly present a plan to return — excess fees to the clients’ accounts. After that, they could be subject to punitive fines as well. FINRA stresses the obligation of the firm to monitor brokers’ recommendations in 529 plans.
In these days of online access, it is easy to research and compare direct-sold 529 plans at SavingforCollege.com. The site even awards gold stars in its evaluations of overall internal investment costs and performance results of every state plan. Their analysis takes state income tax benefits into consideration in helping savers choose the best plan.
What’s the need for a broker in this process? Since state treasurers receive income from program managers based on total assets in the plans, they try to provide multiple points of purchase. And brokers do offer guidance. But the brokers and advisers who sell these plans get up-front commissions and ongoing fees, based on the choice of share class within the plan. That adds additional costs and affects results.
It is the broker’s responsibility to recommend a suitable 529 plan and the most suitable funds within the plan — not the plan that gives him or her the largest commission! In fact, a fee-only financial planner would probably suggest the family go directly to the state plan’s website to open a 529 account.
In broker-sold plans, the Class A shares (which have an up-front commission of up to 5 percent) will likely be less expensive over the long run than the Class C shares (which may have annual fees of 1.5 percent). Yet Class C shares might be suitable for a family that will need the money within a few years — especially now that 529 plans can be used for K-12 education.
Fees can have a significant impact, even inside direct-sold 529 plans. Actively managed funds inside plans will have significantly higher fees than the index fund options. And that’s before any sales charges and ongoing management fees are added by broker-sold plans.
According to a fund fee study by SavingforCollege.com (https://www.savingforcollege.com/529_fee_study/), the index portfolios for the age-based option in Illinois’ Bright Start direct-sold plan carry a management fee of less than 0.07 percent, while the actively managed options charge as much as 0.72 percent. But using a broker-sold Illinois plan could raise all-in costs to as high as 1.86 percent if using the Class C shares!
If you want to know how your 529 investment choices compare based on fees, go to FINRA.org and use their College Savings Plan Fee Calculator (https://tools.finra.org/529_calculator/main) to see how much you are paying on your own 529 account. You might even want to send your broker or adviser a link to your findings!
Comparing fees in a 529 plan is one obvious case where it pays to do your homework — and do it yourself! And that’s The Savage Truth.