Finding the lowest-cost 529 savings plans

Mark KantrowitzBy Mark KantrowitzBy Savingforcollege.com

Savingforcollege.com's 529 Fee Study, updated as of July 1, 2019, showed that 529 plan fees continue to decline on average.

The Fee Study examines the costs of investing in direct-sold 529 plans, with data compiled from the fee tables that are part of the official 529 plan program disclosures. (Advisor-sold plans generally have much more complex fee structures and are not included.)

The study excludes the 'no-fee' bank CD options and insurance-backed guaranteed options found in several 529 plans. Costs include all account maintenance and investment management fees, including the expense ratios of the investments in the 529 plans' investment portfolios.

Expenses can vary among 529 plan portfolios, so it is important to look at the highest- and lowest-cost options and their spread and their average. Looking at the cost outliers and their means together gives a better picture of which 529 plans are providing the greatest value to investors.

Fees and expenses can have a significant impact on how much an investor is able to save in a 529 plan. The fees reduce the return on investment. For example, If the annual return on the underlying investments in Plan A is 7%, and the plan manager charges a fee of 20 basis points, or 0.2%, an investment of $5,000 today will grow to be worth $16,340 in 18 years, $560 less than the same investment with no fees. If Plan B uses the same underlying investments, but charges a management fee of 40 basis points, that same $5,000 investment will grow to $15,798, or $542 (3.4%) less than Plan A. The difference may be even larger if Plan A uses lower-cost investments (e.g., index funds) than Plan B.

However, fees should not be the only factor in selecting a 529 plan. The more important figure is the net performance of a 529 plan account after all costs. In some cases, a 529 plan with high fees and high returns may be a better option than a 529 plan with low fees and low returns.

If available, state income tax benefits should also be considered. Generally, low 529 plan fees are more important for investors with a longer time horizon, and state income tax benefits become more valuable as the child gets closer to college. Parents may consider using an out-of-state 529 plan with low fees when their child is young and switching to an in-state 529 plan when their child enters high school.

Lowest-cost 529 plans

Based on the average cost of the investments used in the Fee Study, Savingforcollege.com found that average costs declined over the past 12 months.

Florida, Louisiana, and Utah have zero-cost investment options (excluding bank and non-market listed securities), which typically include cash equivalent or principal-protected options. The lowest average cost on a theoretical $10,000 investment was in the Louisiana START Saving Program, at $152 on average. None of the five lowest-cost plans – again, on average – charge an annual account fee by default. Three of the lowest-cost plans are available exclusively to in-state residents.

† Available to in-state residents only

Highest-cost 529 plans

At the opposite end of the spectrum, the Achieve Montana plan had, on average, the highest average costs for its investment options with a cost of $1,246 on a theoretical $10,000 investment.

Most expensive 529 savings plans

Annual account fee §

Mean Cost

MT - Achieve Montana

$25

$1,246

HI - Hawaii's College Savings Program

$20/$0

$1,051

WV - SMART529 Select

$25

$1,035

NE - TD Ameritrade 529 College Savings Plan

$0

$978

NV - USAA 529 College Savings Plan

$0

$968

§ - Annual fee may be waived under certain conditions (e.g. state residency)


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