For any parent, saving for college can be a daunting task—but financial advice could help with making the right choices.
There are two kinds of 529 plans, college savings accounts with tax benefits: prepaid tuition programs and plans that are either direct-sold or adviser-sold. With the simple prepaid option, families purchase college tuition in advance; there's seldom a need for a financial adviser's assistance. Direct-sold plans are bought directly from the plan's sponsor or program manager without the assistance of a broker, while adviser-sold plans are purchased from a financial adviser.
If you need help with any 529 plan, you can seek input from a financial adviser. But the cost of such advice depends on which of the following pricing models the adviser uses.
[Take these steps before opening a 529 savings plan.]
1. Free advice: If parents or grandparents have a question or two about a direct plan, odds are an adviser—especially one who handles their retirement accounts—will provide guidance without charge, says Jimmy Williams, a certified public accountant and personal financial specialist in Oklahoma. In some cases, they'll help you fill out the paperwork in hopes of handling all investments in the future, he says.
For instance, Williams counseled a young couple with a newborn about their 529 plan. He spent an hour discussing investment options and showing them how to set up monthly contributions from their checking account. The hope is they'll come back in the future with retirement and other investment needs, Williams says.
[Consider three safe investments within 529 plans.]
2. Commissions: While the savings plan itself may not have a charge, there may be commission-based charges such as fees for individual mutual funds, says Ted Sarenski, a New York-based certified public accountant and personal financial specialist.
For instance, a mutual fund may include a fee of 5 percent on money placed in that fund, he says, so a $10,000 investment would cost $500. Savings and money market accounts would likely have lower fees, Sarenski says.
Because each mutual fund could have a different fee attached, he recommends asking advisers why they select one fund over another. Consistent earnings may make up for the fee, but the adviser needs to show you the numbers to prove that the profit outweighs the expense.
3. One-time flat fee: Parents and grandparents who want to sit down with an adviser to create an investment strategy might pay a flat fee for a financial planning session. Sarenski generally charges between $500 to $750 for this service. Each adviser charges a different fee based on their hourly rate and the duration of the session, he says.
Sessions go over full education plans: goal setting, how much parents plan to save, and preference for types of investments, Sarenski notes. Some advisers will also discuss how to maximize financial aid awards, he says.
[See how to review your college savings progress.]
4. Percentage of assets: A common way for advisers to bill families who want continual monitoring is charging an annual percentage of assets. Percentages vary and are generally 1 to 2 percent, Williams says.
For example, if a grandparent were to invest $65,000 and wants the assets monitored throughout the year, Williams would charge a fee of 1.5 percent of the assets ($975). For this rate, advisers study 529 plan management, performance, fees, and investments. He bills annually but excludes the fee in years clients don't want monitoring of their 529 plans.
No matter what dollar amount is charged for the services provided, talk to your adviser about what you're getting for the percentage you're paying, Williams recommends.
Reyna Gobel, frequently quoted as an expert on student loans and college costs, is the author of "Graduation Debt: How To Manage Student Loans And Live Your Life" and "How Smart Students Pay for School: The Best Way to Save for College, Get the Right Loans, and Repay Debt." She has appeared on PBS's Nightly Business Report and speaks regularly at CollegeWeekLive.