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3 reasons why 529 plans are cutting fees
Margarette Burnette is a freelance writer in Woodstock, Ga.
College savings plans across the country are becoming more affordable as 529 expenses are being reduced. Plans in nearly 20 states have cut fees within the last year -- including those in Michigan, Nevada, and New York.
These fee reductions are helping consumers put more of their investment dollars toward college savings, says John Roth, a senior tax analyst with CCH Inc., a company in Riverwoods, Ill., that provides tax and legal information. In the Empire State alone, reductions will let plan participants save an estimated extra $20 million per year.
The explanations for these fee decreases vary from external economic conditions to internal management decisions, says Roth. Either way, consumers stand to gain. "There's more competition out there to get contributors," he says.
Here are three reasons why 529 plan companies are reducing plan fees and how participants can take advantage.
1. More competition for fewer dollars
When the economy was healthier, people were making more money and had less incentive to look critically at 529 plan fees, says Roth. But because of the economic downturn, not as many people have investment funds to put away for college, he says. People who are investing are scrutinizing their choices more closely, he says.
"I think overall everybody is taking a harder look at where they're putting their dollars because they're experiencing smaller returns," he says.
Plan companies are responding by lowering fees in hopes of attracting more investors from the limited pool, says Roth.
2. Cheaper investment choices
Investment companies such as Vanguard, Fidelity and T. Rowe Price handle the administration of state college savings programs, and they typically select the funds that the plans invest in, says Joe Hurley, founder of Savingforcollege.com.
In past years, many of these funds were actively traded and had high management fees, says Hurley. But lately, more 529 plans are adding index funds or exchange-traded funds, or ETFs, that don't require high management fees to their portfolios, he says.
As a result of the cheaper investment choices, many plan companies are able to pass along the savings to plan participants, says Hurley.
3. Better ratings
Plans with lower fees tend to have higher performance rankings, says Hurley. That's because when one considers the total amount contributed, if less money is spent toward 529 fees, more can be invested, he says. The returns on that invested money will eventually be reflected in the fund results, he says.
"The performance is net of fees, so whatever the fee impact is, the investment performance will be adjusted for that," says Hurley.
Fund companies want high 529 performance plan rankings because higher-rated plans tend to attract more plan participants, says Hurley. With so many plans moving to similar index funds and ETFs, sometimes the performance difference between 529 choices is a direct result of the fee structure, says Hurley.
"I'm not suggesting that these plans have the exact same investments, but more and more of them have similar investments, which makes the fees even more important when you're choosing a 529 plan," he says.
And Roth says lower fees means more capital to work with.
"The more money you have to reinvest, obviously the more your money will grow," says Roth.
Making the switch
After comparing different 529 plans, some participants may decide to change from their existing fund to one with cheaper fees. Contributors are allowed to switch plans once every 12 months, and changing fund plans could be a smart move as long as participants do their research first, says Roth.
Investors need to look at which 529 plans have a historically good performance. They also should consider how long they'll be investing, and they should get professional advice when necessary, says Roth.
In addition, participants should look at the impact of both federal and state income tax advantages. "When the money can grow tax-free, it's always a big benefit," says Roth.
Parents and other contributors who want to save for college can benefit from 529 plan fee reductions. They'll be able to pay fewer fees, enjoy better performing funds and save more overall for the cost of higher education.
Posted December 03, 2010