The Wealthfront 529 College Savings Plan: Is college investing with a robo-advisor right for you?

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Wealthfront, one of the largest and most well known online financial advisors, has recently announced that it will offer a state-sponsored 529 college savings plan to complement its existing suite of investment products. Partnering with Ascensus College Savings and the state of Nevada, Wealthfront is the first robo-advisor to launch its own 529 plan, which could be a worthy competitor to direct- and advisor-sold plans.

What does this mean for families saving for college? The Wealthfront 529 College Savings Plan operates just like any other 529 plan, with federal tax-free earnings growth, flexibility of ownership and favorable financial aid treatment. Yet there are also some significant differences when it comes to fees and required initial contributions.

So if you're in the market for a new 529 plan, or looking to switch, make sure you understand the pros and cons of using Wealthfront's new product.

RELATED: What is a 529 plan?

Pros:

Convenience

For busy parents, being able to set up a college savings plan without having to sit through a lengthy, in-person conversation with a human financial advisor can make the Wealthfront product particularly attractive. Instead of having to carve out a few hours for the meeting and find a babysitter, moms and dads simply fill out an online questionnaire from the comfort of their couch.

Personalized advice

Unlike direct-sold 529 plans, which can require some savvy DIY investing, Wealthfront's college savings plan uses the information provided in the questionnaire to develop personalized recommendations. This includes advice on how much to save each month, based on the type of school the child will attend and the parents' tolerance for risk. Wealthfront will also let a family know if they're missing out on potential tax benefits from not using their home state's plan.

Low cost

According to Savingforcollege.com's Annual College Savings Survey, 80 percent of families who use 529 plans did not work with a financial advisor to open one, mainly because they were concerned about the costs. Typical advisor-sold plans carry a front-end “load,” a commission to compensate the advisor, of between 3.25% and 5.25% (A-Shares) or a flat load of 1.00% (C-Shares).

But the Wealthfront plan offers a solution for families who want professional advice without the high fees. Investors will pay a monthly advisory fee based on an annual rate of 0.25%, plus investment management fees ranging from 0.18%-0.21%. However, the advisory fee is waived on the first $10,000 you have invested with Wealthfront, including any funds in retirement or other accounts. For Nevada residents, the fee is waived on the first $25,000.

That means total, all-in fees for the Wealthfront 529 plan – including the advisory fee – would be 0.43% - 0.46%, which is less expensive than advisor-sold plans and even many, if not most, direct-sold 529 plans.

RELATED: The 15 lowest-cost 529 plans

Investment choices

Most 529 plans offer static or age-based investment options, with the majority of parents choosing the latter. Age-based portfolios will automatically shift investments over time based on the beneficiary's age. As he or she gets closer to college, a larger portion of the account will be allocated toward less risky fixed income investments.

Traditional 529 plans generally only offer a handful of age-based options. With Illinois's Bright Start College Savings Program, for example, accounts are placed into one of six portfolios, depending on the child's age. Yet the Wealthfront 529 plan boasts 20 different portfolios, or glide paths, offering different levels of risk to suit investors' needs.

Diversification

One common strategy investors use to reduce risk is to include investments from a variety of asset classes that perform differently over time. In other words, don't put all your eggs in one basket. The underlying investments of Wealthfront's college savings plan contain nine exchange-traded funds (ETFs) with exposure to a greater mix of equity and fixed income investments than the average direct-or advisor-sold 529 plan.

RELATED: Are parents getting savvier about saving for college?

Cons:

Relatively expensive to start

Families who enroll in the Wealthfront 529 plan will have to make an initial contribution of at least $500, which is higher than the required minimum deposit for almost all direct-sold plans and many advisor-sold plans. And unlike Wealthfront, many of these plans will lower the initial contribution amount if you link the plan to your bank account to make automatic monthly investments.

You could miss out on potential state tax benefits

Currently, 28 states, including the District of Columbia, offer residents a tax credit or deduction for contributions to their home state's 529 plan. For example, a married couple in Indiana earning $100,000 and contributing $100 each month to an Indiana 529 plan would save $360 a year in state taxes - based on claiming a 20 percent tax credit on up to $5,000 per year in contributions.

Savingforcollege.com's State Tax Calculator can help you determine how much your state tax benefit is really worth, and whether it makes sense to stick with your home state's plan.

No performance track record

A 529 college savings plan is an investment account, which means its value will fluctuate based on financial market conditions. Savingforcollege.com tracks 529 plans and assign ratings based on historical performance to help families make a selection. Since the Wealthfront plan is brand new, there's no way to evaluate whether the plan performed in line with the market, or if there were any unusual periods of volatility to be concerned about.

Yet as with any 529 plan, past performance doesn't guarantee future results, and there are other important factors to keep in mind – such as available features and related fees and expenses.

RELATED: 5 ways to judge your 529 plan's performance

Uncertainty about the future

College has become one of the biggest expenses a family will face, with the costs of attending four years at an in-state public university getting close to six figures. One of the biggest advantages of a 529 plan is that tax-free investment growth allows you to maximize your savings potential for the next 18 years, or until your first tuition bill is due.

According to the Statistic Brain Institute, only 58 percent of financial startups remain in business after four years. Wealthfront is still a new and, relatively speaking, small company, especially compared to other 529 managers such as Fidelity, Merrill Lynch, and T. Rowe Price. For some families, this could be a valid concern.

However, the Wealthfront 529 plan isn't completely run by a startup. The program manager, Ascensus College Savings, is part of Ascensus - the largest independent retirement and college savings service provider with over 30 years of experience. Today, Ascensus College Savings services over 3.5 million 529 college savings accounts, including plans with a much longer track record, such as advisor-sold college savings plans.

What's more, the plan is administered by the Nevada State Treasurer's office, which is responsible for one of the largest college savings programs in the country with five savings plans and one prepaid plan, and over $17 billion in assets under management.

RELATED: How to pay your tuition bill with a 529 plan