Digging deeper into 529 plans
Yes, 529 college savings plans are attractive. In fact, for most people, they are the best of the bunch. But 529s are not immune to the same type of scandal that has rocked the mutual fund industry in recent years. Indeed, noting that these savings plans are "complicated and likely difficult for parents to understand," the Securities and Exchange Commission earlier this year launched a task force to undertake a top-to-bottom look at 529s. Members of Congress also sensed something troublesome, particularly in the disclosure of fees and performance, and recently held hearings. "One of the concerns we had was if the tax advantages could be outweighed by the fees charged," Rep. Michael Oxley of Ohio told U.S. News.
What's more, the NASD (the association of securities dealers)--worried that some parents are being sold out-of-state 529s without being told of the potential tax benefits of their in-state plan--is investigating several securities firms. "A broker who directs you to an out-of-state plan may cost you a lot of money in terms of [lost] tax deductions," says Mercer Bullard, founder of Fund Democracy, a mutual fund shareholder advocacy group. "And that can have a more significant impact on your performance than even some fees."
So far, no financial services firm has been accused of any wrongdoing. And, even if some funds do charge high fees, there are several inexpensive state plans to choose from instead. For example, Bryan and Tara Felt, 29 and 28, respectively, plan to open a 529 for their newborn son, Tyler. The Felts first turned to their state-run plan in New Jersey but found that it offers no up-front tax deductions. Instead, Bryan, director of annual giving at Seton Hall University, says he and his wife are contemplating Utah's 529, which offers low-cost Vanguard mutual funds, and Michigan's plan, managed by pension fund giant TIAA-CREF. "There are a few simple things we want: low fees on whatever fund we invest in and minimum contributions low enough where we can afford to get started," says Bryan. Luckily, both plans fill the bill. -Paul J. Lim
This story appears in the September 6, 2004 print edition of U.S. News & World Report.
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