Advisor 529-Plan Landscape: Direct-Sold Plans Gain Favor
Advisors are increasingly favoring cheaper direct-sold 529 plans, and advisor-sold plans are adapting to keep up.
![](https://cloudfront-us-east-1.images.arcpublishing.com/morningstar/CMQ7WWS5VQ2WCC3VWVOJ7QKQJY.png)
As financial advisors have shifted toward fee-based practices, there has been a spillover effect in their choice of 529 plans: stepped-up usage of direct-sold 529 offerings and less interest in more expensive, traditional advisor-sold funds.
One key reason for this is that advisors who have a fee-based business model have greater flexibility to choose the best plan available for their clients, regardless of the distribution channel.
As a result, cheaper, direct-sold 529 plans have become increasingly popular with cost-conscious fee-only financial advisors. On average, direct-sold plans grew by 15% per year from January 2011 through December 2020, while advisor-sold plans (mostly offered by commission-based advisors) grew by a healthy but more modest 10% over the same period.
![](https://cloudfront-us-east-1.images.arcpublishing.com/morningstar/FU6N4P6MJCJ6DJ4UP6JZBQMXKQ.png)
Here, we take a closer look at how advisor-sold and direct-sold 529 plans have evolved in that time. (Morningstar Direct and Office clients can also find the 2021 529 Savings Plan Landscape report here.)
Why Are Fees for Direct-Sold 529 Plans So Much Lower?
Even as overall assets in 529 plans have grown, there’s still a wide gap between fees charged for direct-sold and advisor-sold plans. For an age-based portfolio, the most popular investment option for college savers, the average fee in direct-sold 529 plans was 0.35% at the end of 2020 as compared with 0.89% in advisor-sold plans.
There are a two primary reasons for this fee gap:
1. Plans sold through an advisor cater specifically to financial advisors who receive commissions based on the funds their clients invest in. These commissions tend to drive fees higher in advisor-sold plans’ age-based portfolios, regardless of the type of underlying funds the portfolios use.
2. There are differences in the types of funds typically found in advisor-sold versus direct-sold age-based portfolios. The teams behind advisor-sold plans tend to favor actively managed funds--which charge higher prices--while direct-sold age-based options heavily favor low-cost index funds. The chart below plots age-based portfolios according to their average total expense ratio and their average percentage of underlying funds that are actively managed.
![](https://cloudfront-us-east-1.images.arcpublishing.com/morningstar/LCRMAMKPSZ42KG3M3A6FH32H2Q.png)
The tracks plotted at the top right of the chart, which include age-based portfolios with higher fees and a higher use of actively managed funds, are more often distributed through advisors. Because advisor-sold plans include fewer options that track indexes, investors in those plans often end up with the higher-cost options.
Rating Advisor-Sold and Direct-Sold 529 Plans Direct-sold 529 plans are adapting their lineups to attract fee-based advisors, increasing their comparability to advisor-sold plans. For instance, Utah's my529 has a web portal for fee-based advisors and has adapted its lineup by adding customizable options, which gives advisors greater flexibility without clogging their lineups with static options that might confuse do-it-yourself investors.
As direct-sold 529 plans become more flexible, some advisor-sold plans--including a duo of advisor-sold plans with Morningstar Analyst Ratings of Bronze--have added share classes free of embedded commissions to stay competitive.
Ohio’s BlackRock CollegeAdvantage 529 Plan rolled out an institutional share class since 2019, charging 0.17% for an S&P 500 exchange-traded fund that rivals the cost of many direct-sold options. In 2020, Virginia’s Bronze-rated CollegeAmerica Plan expanded its lineup of F-2 and F-3 share classes for fee-only advisors, which also strip out distribution and 12b-1 fees and can cost as little as 0.25%. CollegeAmerica also offers an F-1 share class to fee-only advisors that does overlay commission fees.
Meanwhile, Illinois’ Bronze-rated Bright Directions Advisor-Guided 529 Plan has offered ETFs and mutual funds through an F share class available to fee-only financial advisors since 2012. The F share offers well-regarded Vanguard index-tracking strategies across the stock and bond universes, though it’s important to note that commission-free doesn’t always mean fee-free: Illinois’ ETFs do come at a steep 0.17-percentage-point premium to the cost of the underlying funds, most of which goes to the program manager, Union Bank & Trust.
Another ripple: In July 2020, we enhanced the methodology used to evaluate 529 plans. Because we're aiming to identify plans that will outperform peers, and price is a strong predictor of future performance, our enhanced methodology removes the distribution channel as an item of consideration and instead compares all plans' fees versus one another. Just as a plurality of advisors can pick a best-of-breed plan for their clients and no longer have to settle for the cheapest option in an expensive lot, our ratings do the same.
![](https://cloudfront-us-east-1.images.arcpublishing.com/morningstar/J4OG7OFBRYKOVXDOAC5YHXNNKY.png)