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Is Your 529 College-Savings Plan Charging Too Much?

Morningstar does a deep dive on fees.

Kalin Liu, 10/16/2012

Age-based options are some of the most popular 529 college-savings plan investments, so their costs have an impact on millions of college savers nationwide. These investments automatically adjust the asset allocation of your savings, becoming more conservative as your child or grandchild gets closer to starting college. The options' simplicity makes them understandably appealing, but their fees are harder to assess. These options can be actively managed, entirely indexed, or a blend of the two. Some plans require you to enroll on your own, while others are sold through financial advisors. All of these factors affect the price you pay, making it hard to compare fees and know whether you're paying a fair price.

Slicing and Dicing
Morningstar sorted 529 age-based options into six buckets to better understand whether the age-based options were competitively priced relative to peers with similar investment strategies and distribution. We categorized these options as either passively managed, actively managed, or a blend of the two. We defined passive as having more than 80% of assets in index funds, and active as having more than 80% in non-index funds. Blend options have more than 20% but less than 80% of assets in index funds. We also split up advisor-sold and direct-sold investments to get six groups total. To keep the data manageable, we only looked at the investments targeted for 10-year-olds.

Age-based options tend to have a mix of stocks and bonds, but the mix isn't the same across plans, and some plans have several choices for 10-year-olds, each with its own asset allocation. Generally, more bond- and cash-heavy investments for older children cost less, while more equity-heavy investments for younger children cost more.

Among the advisor-sold plans, where plans typically offer a variety of share classes, we only looked at A-shares. These usually carry a front-end load, a sales charge that college savers pay when they first invest.

As the table below shows, we found some huge ranges in price within our groupings. In some cases, the range between the cheapest and the most expensive options in a group was over 1.00%. This difference is important because asset-based expenses eat into college savings every year, so the less you pay the larger your college-savings nest egg becomes.

Passive Doesn't Always Mean Cheap
Although the 529 industry's many direct-sold passively managed investments have similar underlying holdings, their prices vary dramatically. The cheapest passive age-based option, from New York's 529 Program (Direct), costs 0.17%. (Even cheaper options have arrived more recently: Since we ran our study, South Carolina's Future Scholar cut the fee on its indexed age-based options aimed at 10-year-olds to as low as 0.11%.)

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