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The Worst 529 Plans

While 529 plans offer many benefits to parents saving for college, the wrong one will charge you an arm and a leg for those benefits.

In general, 529 plans are a great deal. You don't have to pay taxes while you earn income, and if the money goes toward qualified college expenses, that income ends up being tax-free. Recent legislation extended those tax breaks, and the rules for how financial aid treats 529 plan assets are favorable compared to other savings vehicles.

But as you'd expect, some plans are better than others. While some focus on keeping costs low, others charge excessive fees that could threaten the success of your college savings strategy.

Survey says
The Savingforcollege.com website did a survey earlier this year that highlighted the various fees that 529 plans across the country charge. The survey took figures from the prospectus information for each plan, which looks at expenses assuming a $10,000 investment and 5% annual growth over 10 years.

The results were striking in the wide range of fees. The least expensive plan - Louisiana's -- had ridiculously low expenses of just $19 over 10 years. Several other plans, such as North Carolina, Ohio, and Oregon, had options costing between $300 and $400. But some plans really sock their participants with high fees. Here are just a few of the offenders:

State

Name

Manager

Expenses Over 10 Yrs: Highest-Cost Option

Expenses Over 10 Yrs: Lowest-Cost Option

Alaska

T. Rowe Price College Savings Plan

T. Rowe Price (NASDAQ:TROW)

$1,462

$1,135

Illinois

Bright Start College Savings Program

Legg Mason (NYSE:LM)

$1,213

$1,213

Indiana

CollegeChoice 529 Investment Plan

JP Morgan Chase (NYSE:JPM)

$1,374

$1,374

Montana

Pacific Life 529 College Savings Plan

Pacific Life

$3,502

$1,966

Nebraska

College Savings Plan of Nebraska

Union Bank & Trust

$2,183

$1,025

West Virginia

SMART529 Direct College Saving Plan

Hartford (NYSE:HIG)

$1,774

$1,774

Source: Savingforcollege.com

As you can see, some 529 plans really put a dent in your earnings. Montana tops the list, as fund manager Pacific Life takes as much as 35% of your original investment over a 10-year period, depending on which investment option you select within the plan. Even the least-expensive option in Montana costs you nearly a fifth of your original investment after 10 years.

With the costs of tuition, room and board, textbooks, and other related expenses shooting through the roof, you can't afford to pay high fees for college savings. Luckily, you don't have to.

You're not trapped
In some ways, 529 plans resemble an employer's 401(k) plan. Both give you several investments from which to choose. With your 401(k), you usually don't have any say in the choices you have -- you're stuck with whatever options your employer gives you.

With 529 plans, however, you have a choice. Although each state has its own affiliated 529 plan, there's no requirement that you use your home state's plan. Many states have opened their 529 plans to residents of other states, giving you many options.

So what's the best choice?
In general, low-cost plans are a better bet for your college savings dollars. But overall cost isn't everything. You'll need to look at the choices within a plan in order to make sure they fit with how you want to invest. For example, if the only low-cost option within a certain plan is a money market fund, you'll pay more if you want to invest in stocks.

Other factors are also important. If your home state gives you a state income tax break, that may justify paying somewhat higher fees. But in most cases, good low-cost alternatives are the way to go.

For more analysis on top-tier 529 plans, check out the May 2007 issue of our Motley Fool Green Light newsletter. Co-advisor Shannon Zimmerman recommended three plans. If you're curious which plans won out, take a look for yourself -- a free 30-day trial to Motley Fool Green Light will give you access to his article and much more.

Related articles:

Fool contributor Dan Caplinger sends money to his 529 plan every month, rain or shine. He doesn't own shares of the companies discussed in this article. JP Morgan Chase is an Income Investor recommendation. The Fool's disclosure policy gives you an education.


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Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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