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Using fee tables to compare 529 plan expenses
by Joe Hurley, founder, Savingforcollege.com
Monday, February 19th 2007
[Updated March 26, 2008]
View the Savingforcollege.com Comparison Study: 529 Fee Table Examples
Since 2005, the states and their 529 plans have been following a self-imposed set of "disclosure principles" which recommends, among other things, the inclusion of fee tables in a 529 planís official offering materials. These tables are to include examples that illustrate, for each of the programís investment options, the total costs associated with a $10,000 investment over 1, 3, 5, and 10-year periods.
The idea is that the fee tables and examples will make it easier to compare expenses across the many 529 savings plans available to investors. Similar disclosures work well enough for mutual funds (required in mutual fund prospectuses pursuant to the Investment Company Act of 1940). But their usefulness for 529 plans is subject to debate.
All mutual funds have the same basic structure, the disclosure requirements are fairly precise, and the tables and examples published in mutual fund prospectuses are subject to SEC review. You wonít find that to be the case with 529 plans:
- The structures of different 529 plans vary considerably. Investment options can consist of mutual funds, separately-managed accounts, state-managed fixed income pools, bank certificates of deposit, guaranteed investment contracts, stable-value investments, and other types of investments. Some 529 plans combine two or more types of underlying investments within the same investment portfolio. These variations can make the fee tables somewhat difficult to decipher and compare.
- Some 529 plans charge a fixed account maintenance fee on a quarterly or annual basis. Some plans donít. In those plans where an account fee is charged, it is often waived for residents of the sponsoring state, for high account balances, or for automatic-contribution accounts. Account fees are supposed to be reflected in the fee table examples if they apply under the described set of assumptions, but your own 529 account may not fit well with those assumptions. (And why arenít the one-time application fees found in some 529 plans reflected in the fee tables?)
- Underlying mutual fund expenses are built into the 529 fee tables. But fund expense ratios can change every quarter and it is difficult for many 529 plans to keep their disclosures up-to-date. Under the 529 disclosure principles, states are encouraged to update their materials at least annually. Some do, but some do not.
- There is no centralized regulatory review of 529 plan fee tables, leaving the states to develop their own approaches and to identify and rectify any shortcomings. Our review has uncovered several examples of inconsistent disclosure.
- The "age-based" options found in many 529 plans pose a special challenge. In most of these programs, the age-based option moves your money between several different "static" portfolios, each with its own fee structure. To develop an example for the age-based option requires an additional set of assumptions that reflects the actual situation of only small percentage of investors in that plan.
In spite of these issues, Savingforcollege.com has forged ahead and compiled a comparison of 529 plan expenses using the fee table examples gathered from the plansí official offering materials. Our goal was to sift through the data and present a meaningful comparison in one easy table.
- Our study includes only the direct-sold 529 plans. Some of these plans are available only to residents of the sponsoring states. If you are working with a investment broker, your broker should help you in understanding and evaluating the fee tables for broker-sold 529 plans.
- We include only those investment options that include at least one mutual fund and/or separately managed account. We do not include the options that show zero expenses, such as bank CD options or guaranteed investment contracts.
- Our report shows the two lowest-cost options and the two highest-cost options in each 529 plan. This way, you get a better feel for the range of expenses in any particular 529 plan.
- Weíve included some comments to help make you aware of certain key assumptions or other considerations.
You should rely on the official program materials, and not on our report, whenever making investment decisions. Our study is meant to help you understand the fee tables. We intend to update our report periodically.
For a more customized cost comparison, you could try using the FINRA 529 Expense Analyzer. Unfortunately, FINRA does not provide much help in gathering the expense data needed for its Analyzer. Savingforcollege.comís Premium subscribers can easily pull this data for the thousands of different 529 investment options by using our Portfolio Fee and Performance Look-up. Simply plug the expense data provided through our Look-up tool into FINRA'sís calculator.
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