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Key questions for your 529 plan adviser

Posted: 2010-02-19 - Amy Buttell is a freelance writer based in Pennsylvania

by Amy E. Buttell

Like many other investing products, 529 plans aren't always easy to understand, which is one of the key reasons you should consider hiring a financial adviser with expertise in this area.

But even with an adviser in your corner, you still need to be familiar with the basics of 529 plans so you can ask important questions and ensure you're getting the right plan for you and your family.

To get the skinny on the best questions to ask a financial adviser, asked eight of them what questions they would ask. Here are their suggestions:

Tax credits or deductions. Most states offer tax incentives or deductions for residents who invest in 529 plans within their states. Five states -- Arizona, Kansas, Maine, Missouri and Pennsylvania -- offer deductions for contributions made to any state plan, so several advisers recommend you ask questions on this topic, such as:

  • "Do I receive a tax incentive -- deduction or credit -- if I use my state's 529 plan? If so, how does it work?" -- Dale A. Walters, CPA, CFP, chief executive officer, Keats, Connelly and Associates LLC, in Phoenix.
  • "Will I get a state tax benefit? You should always start with your own state's 529 plan if it offers a tax break." -- Rebecca Schreiber, CFP, Solid Ground Financial Planning, Silver Spring, Md.

Compensation. Because advisers are compensated for their expertise, it's important to understand exactly what your adviser's compensation is based on. Many broker-sold plans compensate advisers based on a percentage of the assets you invest. Other advisers are paid by the hour or on some other basis. Consider asking:

  • "What are the fees and how are you paid? Will you be compensated when I lose money? Will you get higher compensation when I make money?" -- Josh McWhorter, president, Black Oak Asset Management, Cartersville, Ga.
  • "How will I pay for the purchase of this investment?" -- Russell W. Dunkin, CFP, a wealth adviser with McKinley Carter Wealth Services, Wheeling, W.Va.

Investment options and fees. The underlying investments are what drive your returns, so it's important to have an understanding of what you're investing in and how it compares to other available options. Investment fees are another area of concern: The more you pay in fees, the better your investments have to perform to make up the difference. Advisers surveyed recommended the following questions in this area:

  • "What are the investment options and expenses? Does the plan have an annual fee in addition to the investment fees? Are fees applied when changing owners or beneficiaries?"-- Walters.
  • "What are my costs? Does the age-based investment portfolio make sense -- is the stock/bond balance right for my child's age?" -- Schreiber.
  • "Is there a fee, load or charge if I wish to get out of the plan you put me into and how does that work?" -- Jonathan Gassman, CFP, CPA, Gassman & Golodny, New York.
  • "Who is the underlying investment manager? How does that manager compare to the manager of my in-state option? (If the adviser is recommending an out of state plan.) How long has the manager been on the job? - Dunkin.

Your state's plan versus an out-of-state plan. Because of the tax deductions or credits offered by many states, many advisers recommend that you start looking first with your home state's plan and then consider other options if your state's isn't suitable for some reason. Questions you might want to ask in this area include:

  • "'Explain my state's 529 plan.' Your adviser should be able to explain to you, in-depth, the strengths and weaknesses of your state's 529 plan, including tax deductions offered, available investment options, fees associated with the plan and whether it is direct (no cost) or adviser-sold (fee paid to the adviser)." -- Clint Gharib, director of insurance and managed products for J.P. Turner & Company, Atlanta.
  • "'If you're recommending an out of state plan, what is the reason for that recommendation?' I've had lots of clients come in with out-of-state plan and in most of the analysis I've done, I haven't seen a case where the performance of an out-of-state plan compensates for losing the tax deduction." -- Linda Pietroburgo, CFP, Moneta Group, St. Louis.

Other concerns. A few other potential areas of concern where our experts suggest you might want to ask questions include:

  • "What happens if my child doesn't go to college?" -- Richards.
  • "Are you familiar with the tax implications of my contribution?" -- Dunkin.
  • "Have there been any significant regulatory or tax changes in college savings recently?" -- Marilyn Plum, CFP, Ballou Plum Wealth Advisors in Lafayette, Calif.
  • "What have been the investment returns of the various investment options?" -- Walters.
  • "Is it guaranteed that the money will be there when my child attends college?" -- Gassman.

Posted February 19, 2010

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