529 College Savings Plans: The Good, Bad & Butt Ugly

A few years ago, I was sitting in an auditorium in Michigan listening to a guy talk up the virtues of a particular 529 college savings plan.

The salesmen made the plan sound wonderful. In fact, I was probably the only one in the crowd who knew that the speaker had put lipstick on a pig. The salesman never mentioned how much this 529 plan cost. In fact, there was no mention of price in any of the sales literature that he circulated throughout the room.

I’m sure he made some sales that night which was a shame since the 529 plan he was peddling was ridiculously expensive.

Unfortunately, what happened in this workplace auditorium was hardly an isolated incidence. Brokers and other salesmen peddle pricey 529 plans to families without them realizing it.

One study, which created a lot of clucking in the financial industry, documented this despicable practice. The study, conducted by researchers at the Universities of Tennessee and Kansas, suggested that salesmen are steering people to expensive 529 plans. The study revealed that the 529 plans with high fees are more popular than the state plans that offer its resident tax deductions.

Most families buy 529 plans through intermediaries, such as brokers and financial planners, so paying too much for the accounts is a common occurrence.

What few parents also realize is that brokers are often wearing blinders. Every state offers 529 plans, but many brokerage firms only allow their brokers to sell one or two plans. And do you think those are going to be the very best ones out there?

Frankly, most families can select a top-notch 529 plan without going through somebody who will stick them in a plan wrapped with a commission and Porky Pig fees that could include investment fees, yearly maintenance fee, enrollment fee and, of course, a commission. And that commission will typically consumes 5.75% of every purchase.

As an alternative, here are four excellent, low-cost plans that you can buy direct:

Nevada: Uses Vanguard index funds.

Utah: Uses Vanguard index funds.

West Virginia: Uses Dimensional Fund Advisors index-like funds.

Alaska: Uses T. Rowe Price mutual funds.

One Response to 529 College Savings Plans: The Good, Bad & Butt Ugly

  1. Wanda Frandsen September 24, 2008 at 1:56 pm #

    As you suggested some months ago, we have invested in the Utah’s 529 plan for several of our grandchildren. Next month we are going to make an investment for other grandchildren. Is Option #8 a good choice? Is there a better one? Our nine grandchildren range from 7 months to 16 years old.

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