Director of Feelings
Paying for college is a current issue which plagues many Americans preparing to attend a higher learning institution. As a result, parents worried about paying for their children’s education have steered more and more money into college saving plans. Under federal law, these plans are sponsored by states and therefore shielded from federal taxes. It is no wonder that there was a surge in investments made from $18 billion in 2002 to $318 billion in 2018. The tax advantages are real, but some of these plans are a worse deal than they may appear. I would argue for a change to the rules for how 529 plans are managed, possibly ending the state monopoly system, which would force the private sector and states to compete for investments.
According to an article on the Washington Post, on average, contributors to 529 plans pay management fees that are twice as high as those for the typical large 401(k) tax-sheltered retirement plan— .6 percent versus .3 percent annually. The worst offenders are plans sold by commission-compensated brokers. Investors in these plans are also more likely to pay brokerage fees.
In some cases, private companies run the plans (meaning they collect checks and handle administration for an array of pre-existing mutual funds, from which investors choose). But they are still charged by the state for the privilege of working under them. By now, 49 states offer 529 plans (529 plans, incidentally, disproportionately benefit the upper-middle class: some surveys have found that fewer than a third of Americans over 20 years old have heard of them, although word may be spreading.) The largest is the CollegeAmerica plan, run out of Virginia and operated by American Funds which has more than $60 billion in assets. That represents fully 20 percent of the national 529 plan total. While it’s among the lower-priced broker-sold plans, CollegeAmerica is nevertheless more expensive than Virginia’s other college savings plan, which is sold directly to consumers.
If states are charging for the privilege of these investment plans, but are not delivering strong oversight, then the federally mandated state control starts to look less like a structure that ensures investor protection and more like a tax on investors. States should be free to offer plans but they should not have a monopoly. Another reform would be to require states to provide individual oversight boards for each plan they sponsor, with each charged with getting the best possible deal for plan investors. Requiring individual boards to oversee 529 plans would create an obstacle to schemes that work against investors’ interests.
Those looking to invest in a 529 plan should act with caution. College savings plans remain a solid savings option in the grander view, but their quality varies widely. Investors should choose with care, keeping a close eye on fees. And they should know that the people charged with overseeing 529 plans may have ambitions that clash with their own financial goals.