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Fees charged to administer a 529 account and its underlying investments directly impact the account’s investment performance and how much your investment grows.
Average fees in 529 plans have dropped dramatically since their creation in 1996, much like other investment products. State treasurers and the agencies responsible for administering 529 plans have been pushing hard for reductions. Meanwhile, outside vendors competing for the right to manage the plans and their investments have been willing to accept lower fees (percentage-wise) as asset levels in plans have risen.
Comparing fees and expenses between different 529 plans can get tricky. However, understanding and comparing are essential to get the most out of your education savings. Here are the four major categories of fees and expenses:
1. Fees charged to the plan for management and administration
Most 529 savings plans hire outside firms to manage the program and its investment portfolios. In exchange, those firms receive a percentage of assets as compensation for their services. The state agencies responsible for administering 529 plans usually receive a share of this asset-based fee to cover their costs. In a few states, program management is done in-house through a state agency and not outsourced to vendors.
Total program management and administration fees range from less than 0.10% to as much as 0.70%. Think of this as the “extra” cost of investing with a 529 plan and its associated tax benefits instead of investing outside a 529 plan.
2. Expenses of the underlying investments
Most investment options in 529 savings plans consist of mutual funds, which incur expenses. Passively managed index funds, with expense ratios below 0.15%, have become commonplace in direct-sold 529 plans. For example, Vanguard’s 529 plan offers age-based investment options with current expense ratios of 0.14%.
Actively managed funds have higher expense ratios, sometimes exceeding one percent. They are primarily used in advisor-sold 529 plans and are still found in several direct-sold plans. Most – but not all – actively managed funds’ primary goal is to outperform their respective index. Therefore, investment management fees drive expenses higher.
Many plans now feature exchange-traded funds (ETFs) in their portfolios. At first glance, ETFs do not make sense inside a 529 plan, as their relative tax efficiency and trading option benefits are mitigated. However, ETFs have performance characteristics comparable to index mutual funds and typically offer very low expenses.
3. Sales charges
If you invest in a 529 plan through a financial advisor—i.e., a registered representative with a broker-dealer—you will incur sales and distribution charges, which is how the advisor is compensated for his or her services. Sales and distribution charges do not apply to direct-sold 529 plans, although a few direct-sold plans charge a modest enrollment fee.
In an advisor-sold 529 college savings plan, you may choose classes (A, B, C, etc.) with each class’s pricing structure. You may be eligible for reduced sales charges (known as a “load” or “sales load”) if the amount you have invested reaches predefined “breakpoint” levels.
Several advisor-sold 529 plans waive their sales load for accounts sold through registered investment advisors (RIAs). Instead of taking sales commissions, RIAs charge a separate fee for managing your portfolio, generally a percentage of your investment balance. Some RIAs prefer to recommend direct-sold 529 plans instead of load-waived, advisor-sold plans.
4. Account maintenance fees
Some, but not all, 529 plans charge a fixed-dollar amount against your account quarterly or annually as an account maintenance fee. The fee is usually between $10 to $25 per year per account, depending on the 529 plan. In some of these plans, the fee is waived when certain conditions are met, such as using your home state’s plan, maintaining a high account balance, or signing up for automatic contributions.
In addition to maintenance fees, you may incur transaction fees for various items, like returned checks or rollover requests.
How can you compare fees and expenses between plans?
Every 529 savings plan will fully disclose its fees and expenses in the official program disclosure statement (sometimes called the “program description”). You can access this online or receive an enrollment kit. The best way to compare 529 plans is to use our free comparison tool. You can also review the investment cost charts in the program disclosure statement, which show the total costs you will pay for each investment option in the plan over one, three, five, and ten years. The charts assume a one-time $10,000 investment in the option and annual growth of 5%.
Savingforcollege.com publishes a 529 Fee Study semi-annually. This study compares and ranks 529 plans for their ten-year total fees, as shown in the investment cost charts. The Study highlights the lowest-cost options as well as the highest-cost options in every 529 plan. (Options that consist of bank products or similar “no-fee” investments are not included in the study.)
How does Saving For College rate 529 plans with respect to fees?
Fees and expenses account for 25% of the total score determining the 5-Cap Rating assigned by Savingforcollege.com to every 529 savings plan. We score the plan using a formula based on its total average expense ratios, average management fees (i.e., total expenses net of underlying fund expenses), fixed-dollar fees, and sales charges (if it is an advisor-sold plan).
To find the best deal, see our list of the best 529 plans, which includes ratings based on fees, performance, investment returns, and more.
