Selecting a 529 plan

Can you provide me any information on how to choose the best 529 plan?

Do you intend to select a 529 plan on your own, or would you prefer to use a financial professional? Your answer to this question will help narrow down your choices, as about half of all 529 plans are sold through brokers.

Here are the two most-common reasons for do-it-yourself 529 investing:

1. You'll incur lower expenses with direct-sold 529 plans.
Broker-sold 529s generally have higher annual costs and may include sales charges of anywhere from 1 percent to 5.75 percent of your contributions. Also, many of the direct-sold 529s (but few of the broker-sold) invest in index funds with low expense ratios.

Broker-sold 529s can offer advantages as well, the most important being that you will receive the help and advice of a financial professional. A capable professional will attempt to match the right 529 plan to your particular investment goals and risk preferences, and help to coordinate your college planning with your other financial objectives, such as affording a comfortable retirement or minimizing potential estate taxes. Comprehensive financial planning is no small task. And while financial professionals are generally not permitted to dispense legal or tax advice, their knowledge of the quirky rules and restrictions surrounding the income tax and gift tax treatment of 529 plans can help immensely.

Also, certain mutual funds are available only through broker 529s.

Even if you feel capable of doing the research and planning on your own, you may decide that the time you save by using professional financial help is worth the cost.

One place you might locate a savvy professional is our "Find a 529 Pro" directory. The planners listed there are tested by us, they have access to our professional-level 529 content and tools, and many have attended our educational workshops. The directory includes contact information on both commissioned brokers and fee-only financial planners in your area. Brokers generally receive a commission on the amount you invest. Fee-only planners bill on an hourly basis or charge a certain percentage of the value of your portfolio.

As for choosing the plan itself, here are some suggestions:

Step 1: Identify any "must have" features.

Here are just a few examples of specific needs that families may have when shopping for a 529 plan:

• The ability of other family members to make contributions directly into your account.
• An "accelerator" program , such as Upromise Rewards or Fidelity's 2 percent Rewards MasterCard, that automatically deposits purchase rebates into a 529 plan. Some of these rewards programs are linked only to certain 529 plans.
• The possibility of joint ownership or the ability to transfer account ownership at any time.
• A minimum contribution level that does not exceed the amount you have to invest.

Step 2: Identify the plans offering the best investments within your risk parameters.

This exercise is not much different from picking mutual funds for your IRA or 401(k). You'll want to have confidence that the investment managers in a 529 plan are going to do a good job for you. Are you a conservative investor or an aggressive one? Do you prefer an "age-based" approach that automatically adjusts the market risk of your 529 account as your beneficiary approaches college? Only certain 529 plans offer this option, and these plans set different asset allocation targets at specific ages. Do you prefer a particular fund company and want your college savings invested only in that company's mutual funds? Alternatively, you may prefer a "multimanaged" program that blends together mutual funds from different fund companies.

The investment vetting process is neither easy nor certain. Many 529 plans have short investment histories, and even those with longer histories may have made substantial changes in their portfolios along the way. Performance comparisons are difficult to make, since investment options do not necessarily match up, and performance-reporting systems may vary. This should improve over time as 529 plans adopt uniform reporting guidelines recently issued by a state treasurer's group, the College Savings Plans Network. Also, remember that in investments, past performance never guarantees future results.

Step 3: Identify any other important differences between programs.

Program fees and expenses are an obvious consideration, as they will directly impact your return. Less-obvious considerations include such things as: the quality of the program call center when you have questions or need help; the frequency and content of account statements or online resources; the ease of requesting withdrawals and the likelihood that your state will not impose tax on qualified withdrawals. Remember, however, that you are not locked into your original choice of 529 plan. A concern that crops up later can often be alleviated by rolling over your account to another 529 plan (subject to rollover requirements).

If it sounds confusing, that's because it can be. But don't let that deter you from getting started on your college savings. College costs won't be going down anytime soon.