A recent edition of Investment News had one of those front page advertisements that’s meant to look like the front cover of the magazine. The tag line was “Think 529 plans are small time? Top-producing advisors say THINK AGAIN”. This caught my eye because 529 plans sold by brokers are a pet peeve of mine. The advertisement (from Legg Mason) made it clear that there’s a lot of money to be made by selling 529 plans to unsuspecting people trying to save for college.
The reason I say “unsuspecting” is that there is no reason to pay a commission to an advisor for a 529. Every state except Washington (not sure what Washington is waiting for) has a no-load 529 program that can typically be applied for on-line. Most programs have age-based portfolios that automatically adjust risk as the child approaches college, so an advisor is not typically adding a lot of value by picking specific mutual funds. The main differences between 529 plans are due to the manager who administers the plan and whether the particular state gives a state tax deduction for residents participating in the plan. A tax deduction is something that should be seriously considered if it’s offered. 34 states offer some amount of deduction and 7 states don’t have state income tax anyway. Of course, California is one of the remaining 9 states that doesn’t offer a deduction.
There is no restriction on which state’s 529 plan you can invest in, so it comes down to which manager does the best job and has the lowest fees. I like the following:
California (Manager: Fidelity) – in particular, I like the age-based Index portfolios
Utah (Manager: Vanguard) - very low expenses
Alaska (Manager: T. Rowe Price) – age-based portfolios are a little more aggressive
Iowa (Manager: Vanguard) – very low expenses
Each of the above plans have low-costs, an easy application process with no application fee, and great underlying funds. Since a 529 plan is meant to be a “set it and forget it” type of investment, I see no reason to pay the commissions and extra expenses for a broker-sold plan, and there just seems to be something wrong when an investment company advertises how much money can be made off of “selling” 529 plans.
