|The downside of 529 plans
A state-sponsored 529 college savings
plan has a lot going for it. But the cost may be higher than you
think. Some plans are teeming with fees.
"There's some really rotten plans out there," says Mari
Adam, a certified financial planner in Boca Raton, Fla. "There's
a few rotten apples."
Invest in a high-priced plan and you'll lose a nice
chunk of earnings to hefty management expenses and other fees.
"Fees vary dramatically between 529 plans,"
says John Gannon, director of the NASD office of investor education.
"People need to consider that, especially if you're making
small investments. Any sort of annual fee structure can really hit
Let's say your family contributes $600 a year to a college
savings plan with a $50 annual maintenance fee. And let's suppose
an 8 percent return, which would be pretty good these days.
By year's end the account balance would swell to $648.
But that $50 maintenance fee would knock it back down to $598. So
after a year of investing, you've got $2 less than when you started.
Invest $300 a year in a college savings plan and
that $50 fee packs an even bigger wallop. An 8 percent return would
boost the account balance to $326 after a year. Toss in the $50
maintenance fee and your account balance bounces all the way down
After a year of investing, you've got $24 less stashed
away for college than when you started. That's no way to build up
a college fund.
And let's face it. A key advantage of a 529 plan
-- tax-free earnings -- matters little if fees eat up all or most
of your earnings.
"The advantage of the account, earnings
growing tax-free, is moot because you've got no earnings,"
says Gary Pressley, president of Academic Funding Group in St. Paul,
The good news is many college savings plans will
waive annual maintenance fees to in-state residents, people who
make automatic contributions and people with large account balances,
often $25,000 or more.
The bad news? There are plenty of other fees to worry
Several college savings plans charge you right from
the get-go with one-time enrollment fees. These fees range from
$10 to $90. Most fees are under $50.
Asset-based management fees
The most troublesome fees for families stretching to save
for college are fees that are charged every year, such as an asset-based
management fee. This fee represents the operating expenses of the
college savings plan and is charged as a percentage of the plan's
assets each year.
"That's the type of fee that can really
eat into your return," Gannon says.
A 1-percent, asset-based management fee means a fee
equal to 1 percent of the plan's assets gets deducted each year.
A 5-percent, asset-based management fee means a fee equal to 5 percent
of the plan's assets gets deducted each year.
The higher the asset-based management fee the more
earnings get swiped out of your account every year.
Be sure to look for management fees and expenses
associated with the individual mutual funds you've chosen in your
college savings plan. This kind of fee is called an underlying fund
expense and is charged as a percentage of the assets of a mutual
Some states include underlying fund expenses in a plan's asset-based
management fee. Other states charge underlying fund fees separately.
Be sure to check.