529 savings plans -- Page 2

A key advantage of a 529 plan -- tax-free earnings -- matters little if fees eat up all or most of your earnings.

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 about.

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.

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 fund.

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.

Expenses vary widely between 529 plans. Some plans charge asset-based management fees below 1 percent. Other plans charge annual management fees exceeding 8 percent or10 percent. Choosing a low-cost 529 plan could save you hundreds of dollars in fees every year.

Let's say you've got $10,000 invested in a college savings plan. Choose a 529 plan with an annual operating expense of 1 percent and you'd pay a fee of $100 after a year. Choose a plan with a 10 percent operating expense and you'd pay a $1,000 fee after just one year.

Suppose you invest $10,000 in a college savings plan with an annual operating expense of 10.97 percent. Let's say you get a return of 10 percent before expenses. After 18 years, you'd have just $6,866 saved for college, more than $3,000 less than when you started.

Now let's say you invest $10,000 in a college savings plan with an annual operating expense of just 0.85 percent with that same 10-percent return. After 18 years, you'd have $47,680 to pay for college expenses, an increase of $37,680.

Finding a fruitful plan
A state-by-state listing of programs can be found at Bankrate's interactive Compare Rates locator. Savingforcollege.com, also provides a 529 Evaluator that lets you compare 529 plans by cost and several other categories.

Keep in mind that annual expenses also could vary widely within a single college savings plan. It all depends on the investments you choose.You'll see the biggest swing of investment costs within a single plan when you select a college savings plan that charges initial or deferred sales loads.

With an initial sales load you pay a fee as soon as you purchase an investment option.

Let's say you invest $10,000 in a mutual fund with an initial sales load of 5 percent. The fee is $500, so only $9,500 actually makes it into the mutual fund.

With a deferred sales load, you're charged a fee after you withdraw money from an investment. This fee gets lower and lower the longer you hold on to an investment.

Many financial advisers encourage parents to avoid 529 plans that charge load fees. With such a short time horizon to save for college, 18 years and often much less, it's important to keep your investment expenses as low as possible.

Looking for a low-cost 529 plan? A state-sponsored 529 plan managed by TIAA-CREF or Vanguard is a good place to start. These plans offer a diverse set of investment options at a low price.

Families looking to steer clear of high fees will want to pass on broker-sold 529 plans. A broker-sold 529 plan could be two or three times more expensive than a 529 plan offered directly from a state. In general, direct-sold plans have lower costs.

When it comes to studying the costs of a 529 plan, take your time and make sure you understand all the details.

The key thing you're looking for is a low-cost 529 plan with a diverse set of investment options. Try to stay with annual expenses of 1 percent or less. Any plan with annual expenses that exceed 1.3 percent should be considered on the pricey side.

Before studying 529 plans from across the country, be sure to take a hard look at the college savings plans available in your state. The reason? Your state may offer some pretty substantial state tax incentives and other benefits for choosing one of its 529 plans.