COLLEGE SAVINGS 101

Savingforcollege.com

The 529 plan F-Word
http://www.savingforcollege.com/articles/the-529-plan-f-word-681

Posted: 2014-10-06

by Kathryn Flynn

Almost all college savers will agree that the most hated four-letter word associated with 529 plans is F-E-E-S. In fact, according to a recent Savingforcollege.com survey, families who were looking to open a new 529 plan ranked “low administrative plan fees” as the most important factor in choosing their plan.

So what’s the big deal about fees? Simply put, fees and expenses can eat away at your investment returns and shrink your savings. If you put $100 into a 529 account at the time your new baby is born and contribute $100 each month for the next 18 years, you’d have $39,597 when it’s time for college, assuming an investment return of 6%. But wait – your plan has a total expense ratio of 0.25%. That means your balance in 18 years would actually be $38,577. If your plan’s expense ratio were 2.0% you would be left with only $32,208!

Fortunately many 529 plans have been reducing their fees dramatically and there are now many more low cost options available. In any case, it’s a good idea to compare the fees when you are deciding which 529 plan to choose. Here’s a quick slideshow to help you understand the different charges:

Start SlideShow

Find the Lowest Cost 529 Plans

Photo credit: Can Stock Photo/njnightsky

1. Program Management and Plan Administration Fees

  • Compensation is paid to outside firms to manage the plan and the investment portfolio.
  • State agencies that administer the plan usually receive part of this fee to cover their costs.
  • A few states handle program management in-house, which sometimes results in a lower fee.
  • Fees range from 0.10% - 0.70% of assets

8 Common 529 Plan Mistakes to Avoid

Photo credit: Can Stock Photo/PixelsAway

2. Expenses of the Underlying Investments

  • The mutual funds and ETFs that make up a 529 plan incur their own expenses.
  • These expenses vary, depending on how the fund is managed.
  • Actively managed funds are generally more expensive because you are paying a manager to try and beat the performance of an index.
  • Index funds and ETFs tend to mirror the performance of an index and are usually a lower cost option.
  • Fees range from 0.06% - 2.62% of assets

12 States Offering FDIC Insured Options

Photo credit: Can Stock Photo/ribah2012

3. Sales Charges

  • When you purchase your 529 plan through a financial advisor will you pay sales and distribution fees. (Some direct-sold plans may charge a modest enrollment fee).
  • There are typically different share classes available (A, B, C, etc.), each with their own pricing structure.
  • The sales charge may be reduced if the total of all your investments, including IRAs and brokerage accounts, are within the same fund family and reaches certain breakpoints.
  • If you are working with a Registered Investment Advisor (RIA) you may be eligible for a load-waived share class.
  • Fees typically range from 3.0%-5.0% of assets

You’re Saying My Financial Advisor Can Help Me Pay for College?

Photo credit: Can Stock Photo/AndreyPopov

4. Account Maintenance Fee

  • 529 plans may charge a fixed dollar amount either quarterly or annually for account maintenance.
  • The fee is often waived for:
    • Residents of the state where the plan is administered.
    • Accounts with balances above a specified amount.
    • Participants who sign up for automatic contributions.
    • Participants who elect to receive plan documents electronically.
  • Some plans may also charge fees for things such as returned checks or rollover requests.
  • Fees range from $0.00-$50.00

Understanding 529 Expenses

Photo credit: Can Stock Photo/monkeybusiness

Almost all college savers will agree that the most hated four-letter word associated with 529 plans is F-E-E-S. In fact, according to a recent Savingforcollege.com survey, families who were looking to open a new 529 plan ranked “low administrative plan fees” as the most important factor in choosing their plan.

So what’s the big deal about fees? Simply put, fees and expenses can eat away at your investment returns and shrink your savings. If you put $100 into a 529 account at the time your new baby is born and contribute $100 each month for the next 18 years, you’d have $39,597 when it’s time for college, assuming an investment return of 6%. But wait – your plan has a total expense ratio of 0.25%. That means your balance in 18 years would actually be $38,577. If your plan’s expense ratio were 2.0% you would be left with only $32,208!

Fortunately many 529 plans have been reducing their fees dramatically and there are now many more low cost options available. In any case, it’s a good idea to compare the fees when you are deciding which 529 plan to choose. Here’s a quick slideshow to help you understand the different charges:

Start SlideShow

Find the Lowest Cost 529 Plans

Photo credit: Can Stock Photo/njnightsky

1. Program Management and Plan Administration Fees

  • Compensation is paid to outside firms to manage the plan and the investment portfolio.
  • State agencies that administer the plan usually receive part of this fee to cover their costs.
  • A few states handle program management in-house, which sometimes results in a lower fee.
  • Fees range from 0.10% - 0.70% of assets

8 Common 529 Plan Mistakes to Avoid

Photo credit: Can Stock Photo/PixelsAway

2. Expenses of the Underlying Investments

  • The mutual funds and ETFs that make up a 529 plan incur their own expenses.
  • These expenses vary, depending on how the fund is managed.
  • Actively managed funds are generally more expensive because you are paying a manager to try and beat the performance of an index.
  • Index funds and ETFs tend to mirror the performance of an index and are usually a lower cost option.
  • Fees range from 0.06% - 2.62% of assets

12 States Offering FDIC Insured Options

Photo credit: Can Stock Photo/ribah2012

3. Sales Charges

  • When you purchase your 529 plan through a financial advisor will you pay sales and distribution fees. (Some direct-sold plans may charge a modest enrollment fee).
  • There are typically different share classes available (A, B, C, etc.), each with their own pricing structure.
  • The sales charge may be reduced if the total of all your investments, including IRAs and brokerage accounts, are within the same fund family and reaches certain breakpoints.
  • If you are working with a Registered Investment Advisor (RIA) you may be eligible for a load-waived share class.
  • Fees typically range from 3.0%-5.0% of assets

You’re Saying My Financial Advisor Can Help Me Pay for College?

Photo credit: Can Stock Photo/AndreyPopov

4. Account Maintenance Fee

  • 529 plans may charge a fixed dollar amount either quarterly or annually for account maintenance.
  • The fee is often waived for:
    • Residents of the state where the plan is administered.
    • Accounts with balances above a specified amount.
    • Participants who sign up for automatic contributions.
    • Participants who elect to receive plan documents electronically.
  • Some plans may also charge fees for things such as returned checks or rollover requests.
  • Fees range from $0.00-$50.00

Understanding 529 Expenses

Photo credit: Can Stock Photo/monkeybusiness

 

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