College savings accounts come with a price. When parents compare prices on 529 plans, tax-advantaged college investment accounts, they're looking at what are known as average costs. The average cost represents what the average investor pays, but there a lot of choices within 529 plans that can cause the total price to change for individual families.
There are typically different fees for common investment options. Parents should be aware that there is generally also an annual fee on all money invested in the plan, around half a percent of the total money invested.
Families need to ask plan managers or financial advisors about the costs of the investment options they have or will choose. Generally, the following are true about 529 plan investment options.
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1. Savings accounts are often the cheapest investments. Savings accounts within 529 plans do not have additional investment fees, says Mackey McNeill, a Kentucky-based certified public accountant and personal financial specialist. It's much like investing in a savings account at a bank – but within a 529 plan, an overall program management fee is charged.
If a family were to put $1,000 into a savings account within a 529 plan, they'll still get charged the program management fee, typically 0.5 percent, or $5 for the year. To make investing money in a savings account within a 529 plan worth it, they'd have to earn an interest rate that's 0.5 percent more than what they'd earn from a local bank.
Another scenario where it would still make sense to invest in a savings account within a 529 plan is in a state where 529 plan contributions are tax deductible.
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2. Money market funds charge fees, which are taken out of earnings. Money market accounts contain extremely short-term bonds. Because each bond is held within the account for as little as a few days, there is little risk for the account holder of its dropping in value.
This investment option is similar to savings accounts because of their relative safety, but additional fees are assessed. A typical fee is 0.05 percent to 0.1 percent of the value of the money market account, says McNeill. However, the fees are only taken out of earnings, she says.
As with any investment within a 529 plan, program management fees are also assessed. Because these accounts are relatively interchangeable with savings accounts, which don't have associated investment fees, it's only a worthwhile investment choice if the account is earning at least the same percentage as the investment fee and more than a savings account.
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3. Index mutual funds are cheaper to invest in than mutual funds not based on indexes. An index fund is a mutual fund tied to a financial index such as the Standard & Poor's 500 index. These investments require less management by the mutual fund manager, because the manager doesn't have to research individual stocks for the fund.
As a general rule, investment fees are assessed based on the amount of research needed, says Michael Goodman, a New York City-based certified public accountant and personal financial specialist. Thus, the price is typically higher on non-index mutual funds.
Annual index fund fees generally range from 0.1 to 0.35 percent of the value of the account, while other funds may charge double that, or more. Whether a non-index fund is worth the price depends on the fund's growth history and also how much you trust the investment manager, McNeill says.
Since it's hard for the average person to assess an investment manager's track record, she suggests families talk to their plan manager or advisor before selecting this option.
While these are typical costs of each investment option, it's important families check the costs with their financial advisor or plan manager before making any investments. "The fees charged for the same fund in different state plans can vary due to how each state set up their plan," says Ted Sarenski, a New York-based certified public accountant and personal financial specialist.