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Is Your 529 Plan Sporting an Ivy League Price Tag?

Morningstar found fees are dropping, but not all plans are bargains.

Kailin Liu, 06/11/2013

Here's the good news: Your 529 investment probably costs you less today than it did a few years ago. But 529 investments still tend to be more expensive than similar mutual funds, and some plans are steeply priced.

Morningstar has tracked the movements in 529 investments' fees since 2010. Then we found that 529 categories charged up to 40 basis points more on average than the analogous open-end fund peer group. That difference shrank to 31 basis points in 2011. The decline has continued, with all of the 529 categories below showing lower average expense ratios in 2013 than in 2011. (Note that the aggressive-allocation open-end fund category didn't exist in 2011.)

These fee reductions slightly narrowed the expense gap between 529 investments and their respective open-end mutual fund equivalents. The average large-blend 529 investment option continues to undercut the average open-end large-blend fund on price. As of January 2013, the typical large-blend 529 investment charged 1.05%, down from 1.13% in 2011, as more plans added indexed options to their 529 plans. Over the same period the average open-end investment expense ratio has risen to 1.27% in 2013 from 1.14% in 2011.

Index funds don't entirely explain the price reductions in the 529 industry, however. Several states aggressively negotiated for lower-cost investments in 2012 as their 529 program management contracts were up for renewal. South Carolina's direct-sold Future Scholar 529 program is a notable example. The Columbia-run plan dropped its prices to become one of the cheapest on the market; its average total expense ratio dropped to 0.13% in 2013 from 0.49% in 2011. The underlying investments were formerly a mix of active and passive management and are now entirely passively managed. Additionally, the direct-sold plan has no program management fees. Now the plan is even cheaper than New York's 529 Program and the Utah Educational Savings Plan, which are much larger plans by assets under management and historically had been the lowest-priced index options available to college savers.

In fact, several of the cheapest plans on the market in January 2013, such as Michigan Education Savings Program and EdVest 529 Plan, are plans that were formerly priced near or above industry peers and recently negotiated more-competitive fees for college savers by substituting index options and dropping program management fees. The table below shows each plan's average and asset-weighted total expense ratio.

So, how do you know if you're getting a good deal? While overall expense ratios tend to be higher for advisor-sold age-based options, the biggest amount of variation in expenses comes from direct-sold passive options. The cheapest direct-sold passive option charged 0.11% on average, while the most expensive charged a whopping 0.85%.

Kailin Liu is a Mutual Fund Analyst with Morningstar.

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