Investors can Rein in College Savings Plan Fees
BOSTON (AP) - Rising college costs have become an election campaign issue. President Obama spoke at three campuses this week, vowing to keep student loans affordable. He’s also threatened to cut federal aid for colleges that fail to keep tuition increases in check.
Obama is spotlighting the issue because he’s aware how many voters fret about paying for a child’s education without draining retirement savings. As a necessity, parents and their children should pay close attention to the costs they’ll pay and the schools they select.
Yet many apparently are giving comparatively little thought to another piece of the equation, the cost of saving for college. How else to explain the large proportion of parents choosing college savings plans that charge steep investment fees, despite the widespread availability of affordable plans?
It’s an important consideration, because those fees can significantly cut into investment returns and the accumulated savings.
Consider recent research on 529 college savings plans, named for the section number of the federal tax code from which they were created. These state-sponsored investment accounts permit withdrawals for college expenses to be made free of federal taxes.
The Coalition of Mutual Fund Investors found that plans sold through financial advisers or brokers charge more than twice as much in annual fees than plans that parents choose directly through states and manage on their own. The public-policy advocacy organization examined plans in 30 states and Washington D.C. that offer both "adviser-sold" and "direct-sold" 529s.
On average, the adviser-sold plans were 2.15 times as expensive. That calculation factors in annual expenses for mutual funds offered in those plans’ investment menus, as well as program management and certain other fees.
The difference was larger when the fund investor organization also included initial sales charges and account maintenance fees that an investor would pay over 10 years - the time span many parents spend building up a 529 account. That comparison found adviser-sold plans cost 2.73 times as much, on average.
In dollar terms, the 10-year cost of a $10,000 investment was an average $1,944 for adviser-sold plans compared with $712 for direct-sold plans. "It seems to me that the cost disparity is more than the advice ought to be worth," says Niels Holch, director of CMFI.
The organization’s findings are in line with the conclusions of Morningstar, which rates 529 plans. Last fall, it found that adviser-sold plans charged expense ratios of 1.47 percent on average, compared with 0.54 percent for direct-sold plans. Those are the ongoing expenses to cover operating costs, expressed as a percentage of assets in the mutual funds a 529 account invests in.
Despite that huge gap, many parents opt for the higher-cost plans. The $133 billion in total 529 assets is split about equally between adviser- and direct-sold plans.