college

529 college savings plans reduce fees

a graduation cap and a pile of money
Highlights
  • At least 18 states have reduced 529 plan fees in the past year.
  • Costs are going down because states are vying for parents' dollars.
  • Parents aren't limited to choosing a 529 plan in their home state.

Saving for college may now be easier, because many 529 college savings plans have recently reduced the fees they charge plan participants. At least 18 states have reduced plan fees in the past year, including New York, Arizona and Minnesota.

In New York, 529 plan fees, which are often expressed as a percentage of total assets, have been cut almost in half -- from 0.49 percent to 0.25 percent.

College savings plans charge fees to pay for their administration costs as well as investment management, says Joe Hurley, CPA and founder of Savingforcollege.com. Expenses for the underlying mutual funds in those plans also contribute to the total cost.

When plans reduce fees, more of participants' invested funds can go toward building principal, says Hurley. In the New York plan, it is estimated that plan participants will save an extra $20 million per year because of their fee reduction.

"When costs go down, net returns go up," he says. "It means you can save more money for college."

Increased competition

Hurley says one major reason costs are going down is that states are vying for parents' investment dollars. "It's a very competitive landscape among states that want to see their 529 plans become popular and grow," he says.

Hurley says that states routinely outsource the management of their 529 college savings plans to outside companies, such as Vanguard, T. Rowe Price and Fidelity, and these companies have been fairly aggressive in reducing plan fees.

Another reason for fee reductions is that in many cases, managers are choosing less expensive investment options for 529 college savings plans, says Hurley. "There is a trend to invest more in index funds, which tend to have lower management fees," he says. "In the past, plans might have used more higher-cost, actively managed funds."

According to Rob Seltzer, a CPA and personal financial specialist in Beverly Hills, Calif., 529 plans with lower fees tend to have higher ratings from investment research services, such as Morningstar.

"Even if a customer doesn't research a plan's fees, if they look at a fund's ratings, they'll likely choose the higher ranking plans. And those options are likely to also have lower fees," says Seltzer.

As a result, less expensive funds are going to attract more investors, and this can create a domino effect. Other higher-cost 529 college savings plans with higher fees may have to lower their own costs to draw in plan participants, he says.

Investor inspection

At the same time plans are lowering fees, plan participants also may be more sensitive to costs because they've been getting lower returns in the market, says Seltzer.

"When things are rosy and people are making good returns, they're not as aware of fees that are higher than they should be," he says. But the down economy has invited more scrutiny by plan participants. "If there's a silver lining to the market meltdown, it's that people are more cognizant of what costs are," says Seltzer.

If you are looking to see if your 529 plan -- or one you are considering -- has lowered fees, you can conduct research at websites that lists costs and features for each plan, such as Savingforcollege.com, says Hurley. Remember, you are not limited to choosing a plan in your home state. You can invest in 529 college savings plans in other states, too.

Hurley says that just because a different 529 plan may offer a lower rate, it doesn't necessarily mean investors should make an immediate switch. Plan participants should consider several factors before deciding to invest. They should look at how much money they'll be investing, how many years they have until their child goes to college and if they'd be receiving any state income tax benefits, he says.

Hurley advises individuals to contact a qualified financial adviser for specific advice, especially if they're looking to move their money from one place to another. "You have the option to move your money between 529 plans, but only can make the move once every 12 months," he says.

While saving money on plan costs is important, Hurley also advises plan participants to make sure they don't lose sight of their overall goals. "Over time, the actual investment performance of the plan is more important than the fees," he says.

News alert Create a news alert for "college financing"

advertisement

Show Bankrate's community sharing policy
          Connect with us
advertisement
FRUGAL NEWSLETTER

Discover new ways to cut costs and save more every day. Reduce your spending, not life’s pleasures. Delivered weekly.

advertisement
Partner Center
advertisement

Connect with us