A war has erupted among administrators of various 529 plans -- bad news for the fees they're slashing, but good news for anyone using these financial vehicles to save up for expected college expenses.
529s 101
Each state offers one or more of its own 529 plans, but many don't require you to be a state resident in order to participate. So if you spot a great plan 17 states away, you may still be able to use it. 529s vary in attractiveness; even if your state's plan offers special tax benefits to residents, it still may not be the best plan for you.
In most cases, 529 plans let you save as much as you can afford. Most plan maximums top $200,000, and many top $300,000. The plans also give you tax-free growth on money you'll eventually spend on college expenses. When you consider that the annual cost of tuition, room and board at many colleges already tops $50,000, that's a pretty sweet deal.
The slashing scoop
Here's the nitty-gritty on the recent fee changes:
- Fidelity Investments recently announced that it's cutting its fees by one-third to one-half in New Hampshire, California, Massachusetts, Delaware, and Arizona.
- TIAA-CREF has lowered fees for its Kentucky, Vermont, and Minnesota plans.
- Vanguard recently lowered fees for its Nevada, New York, Iowa, and Colorado plans.
Graduate-level fee analysis
When you compare 529 plans, look for low fees, a solid performance track record, attractive investment options, and any available special tax breaks for in-state residents.
Need an example? The New York 529 College Savings Program Direct Plan offers investors a range of Vanguard mutual funds to choose from -- a company known for its ultra-low-cost index funds. These are just a few of the available choices, each of which carries a paltry annual fee of 0.49%:
|
Portfolio Name |
3-Year Return |
5-Year Return |
Holdings of Underlying Fund Include ... |
|---|---|---|---|
|
Growth Stock Index Portfolio |
(4.47%) |
0.98% |
IBM (NYSE: IBM), Cisco Systems (Nasdaq: CSCO) |
|
Mid-Cap Stock Index Portfolio |
(7.22%) |
1.82% |
Intuitive Surgical (Nasdaq: ISRG), Micron Technology (Nasdaq: MU) |
|
Aggressive Growth Portfolio |
(7.13%) |
0.38% |
General Electric, Procter & Gamble (NYSE: PG) |
|
Value Stock Index Portfolio |
(9.81%) |
(0.38%) |
JPMorgan Chase (NYSE: JPM), AT&T (NYSE: T) |
Data: New York 529 College Savings Program.
True, those returns don't look spectacular. But they generally compare well with the S&P 500, especially given 2008's plunge.
Fees can be a very big deal; ignoring them can set you up to fail. That's why their recent plunges are such good news. Imagine that you save $5,000 per year for Junior's college expenses, and that principal grows for 15 years at 8% after fees are deducted. If the fees are reduced by half a percentage point, so that you instead earn an average of 8.5%, your ultimate total will be $153,000. The $6,500 you'll gain from the fee cut is nothing to sneeze at.
Watch those fees
Look for more plans to lower fees. New York's plan will negotiate its next contract soon, and the major players will want to woo it. Note that while program fees are being cut, the fees charged by the underlying mutual funds will probably staying the same -- which is all the more reason to give low-cost index funds a closer look.
Another way you can achieve a significant fee cut is to make sure you use a low-cost plan to begin with. Some plans charge close to 1% in program fees, in addition to fees charged by the underlying investments. Other plans charge no program fee.
Just as you seek out the best companies for your retirement portfolio, find the best 529 plans for your family's future college expenses.
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