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 or 10 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.
The Fee Effect
|
| Amount Invested | $10,000 | $10,000 |
| Annual Rate of Return | 10% | 10% |
| Operating Expense | 10.97% | 0.85% |
| Term of Investment | 18 years | 18 years |
| Total Saved | $6,866 | $47,680 |
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.