Saving For Your Kid’s College? Prof Says Not All 529 Plans Are Equal

In Virginia, the Excess Fees of One Plan Help Pay for the Other, Quinn Curtis Finds
Quinn Curtis

Quinn Curtis is the Albert Clark Tate, Jr., Professor of Law.

May 31, 2019

For most parents, the question of how to pay for their children’s college education weighs heavily. Setting aside money early in the form of a 529 account is enticing for numerous reasons, including the tax advantages.

But how do you know which plan is the best option?

Professor Quinn Curtis of the University of Virginia School of Law says, before consumers jump in, they should consider the fees and costs associated. Curtis recently wrote the first scholarly paper evaluating the quality of menus offered by such plans, “Costs, Conflicts, and College Savings: Evaluating Section 529 Savings Plans.”

529 plans, also known as qualified tuition plans, come in two forms: prepaid tuition plans and education savings plans — the latter of which are investment accounts with portfolio options like a 401(k) plan.

Brokers often take a big bite for servicing the investment accounts, Curtis found.

“Plans distributed through brokers are particularly costly,” he writes. “Controlling for size, broker-sold investments are twice as expensive as those sold direct to consumers, even before accounting for brokerage sales charges that may exceed five percent of invested assets.”

He also found that states often use fees from the brokered savings plans to subsidize other activities that do not always directly benefit plan investors.

“This cross-subsidization may undermine incentives for state administrators to negotiate lower costs and is in tension with state boards’ role as fiduciaries,” he writes. “These results raise questions about whose interests are served by 529 plans and whether investors are adequately protected by existing regulations.”

Curtis found that the fees associated with the Virginia-based CollegeAmerica plan, which is the largest college savings plan in the country, subsidize the state’s other 529 plans.

“While among the lower-priced broker-sold plans, CollegeAmerica is nevertheless more expensive than Virgina’s Invest 529 plan and doesn’t offer index funds,” Curtis said. 

CollegeAmerica is rated highly by both Morningstar and Saving for College, but Curtis found that investors in the plan pay fees to the state that benefit other plans.

“With $60 billion in assets under management, the $40 million or so [CollegeAmerica] pays annually to Virginia is barely noticeable to investors, but the fees are still enough for Virginia to fully cover the expenses of operating its other college savings plans, with millions left over,” Curtis noted.

“When states use revenue from one plan to benefit another, we have to ask who is looking out for the interests of investors in the revenue-generating plan,” he said.

Founded in 1819, the University of Virginia School of Law is the second-oldest continuously operating law school in the nation. Consistently ranked among the top law schools, Virginia is a world-renowned training ground for distinguished lawyers and public servants, instilling in them a commitment to leadership, integrity and community service.

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