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Picking right college-savings plan isn't easy

By Justin Pope
The Associated Press

REED SAXON / AP Chris Simmons holds 2-month-old Scarlett as he and his wife, Lisa, watch their daughter Isabel, 2, plan for her birthday party. Chris Simmons says the 529 college savings plans are extremely complicated. Lisa Simmons, an economist, was able to sort it out.

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Chris Simmons isn't some rank amateur when it comes to the complexities of college savings. He's a higher-education lobbyist in Washington, D.C., and he's worked in the field for years.

But when it came time to investigate 529 college-savings plan for his now 3-year-old daughter, Simmons was baffled by the variety of state options — all with their own investment choices, tax rules and sometimes inscrutable fees. Luckily, his wife is an economist and got the family through the process.

"It's overwhelmingly complicated. I don't know how people make those choices," Simmons said. "You can't just say, 'I want to sign up for a 529.' "

As college tuition surges, the popularity of 529s is growing, too. The plans, named for the section of the tax code that allows them, are offered through the states and let investors prepay tuition or set aside money that can grow tax-deferred. At least through 2010, the money can be withdrawn free from federal tax if used to pay for college.

Of the nearly 7 million 529 accounts, nearly half have been set up in just the past two years. During that period, the value of savings set aside has increased 2-½ times to more than $54 billion.

Experts say it's great news that more families are taking advantage of 529s. But there also is concern that some families are getting lost in the many choices and picking bad investments.

Online resources College Savings Plans Network: www.collegesavings.org SavingforCollege.com: www.savingforcollege.com

Every state now offers at least one 529 plan, and investors aren't limited to plans overseen by the states where they live; generally, the money can be used at any college. There is also a 529 run by a consortium of independent colleges.

Many investors turn for advice to brokers, who serve as middlemen for about four in five 529 accounts and often get commissions. But the worry is that brokers are steering too much client money to high-fee, out-of-state funds, and too little to funds in the investors' home states.

The advantages of staying in-state: about half the states offer income-tax benefits for residents on contributions. Also, a few states offer some residents matching grants, and there may be state tax benefits down the line, when the money is withdrawn.

A new study by LeAnn Luna and Raquel Alexander of the University of North Carolina, Wilmington, tracks the investment choices of 529 fund investors in recent years and shows money flowing disproportionately to high-fee, out-of-state funds — in particular to funds managed by well-known companies with big marketing budgets.

That study comes as the NASD, formerly the National Association of Securities Dealers, which regulates brokers, is investigating 20 firms that have put the vast majority of their clients' money into out-of-state funds.

Experts emphasize it may well make sense to choose an out-of-state plan, if it offers lower fees or has better investment prospects. Until recently, Alice Bullwinkle, president of North Star Financial Direction in Lakewood, Colo., told her Colorado clients to buy funds in other states because Colorado's fund options were so bad.

But any advantage in fees and performance has to top the forfeited tax benefit to be worthwhile, and when Colorado's options improved, Bullwinkle told her clients there to stay in-state. It's the kind of advice regulators suspect many customers aren't getting.

"It's got to be a red flag for regulators to see upward of 90 percent of the investors at some firms were sold out-of-state plans," NASD vice chairman Mary Schapiro said.

Diana Cantor, chairwoman of the College Savings Plans Network and executive director of the Virginia College Savings Plan, said she has always advised investors to consider their in-state plan first.

But she said there are valid reasons to go elsewhere, like comfort with a particular fund company. As for brokers, she said it's understandable many investors prefer to work with them, and explained that many broker-sold 529 options have low fees.

For people who want to bypass brokers, there are plenty of direct 529 investment options. The Kansas Learning Quest 529 is available online, for instance; the plan sold through a broker is identical except that it can charge an upfront fee of up to 3.25 percent.

Finding the right fit can be tough, though. Because 529 plans are regulated by the states, not the federal government, disclosure practices on fees and tax rules vary widely. It can take an expert to figure out the upfront, administrative and fund charges.

Luckily for investors, expert services are available. Plans can be sorted and compared side by side at the Web site www.savingforcollege.com. Another resource is research firm Morningstar, which rates 529 plans.

And the states, hoping to stave off more federal oversight, are working on a relatively simple, common disclosure form that will display fee information in the same format for every plan. Cantor said the common disclosure should be in place by next spring.

Some think more federal oversight would benefit investors; U.S. Sen. Peter Fitzgerald, an Illinois Republican who is retiring in January, has argued that state sponsorship of the plans just adds a layer of fees and confusion, and he has called for federal disclosure rules.

But Cantor said that would be a mistake. She said the state plans have been popular as they are, and investors benefit from having state-level trustees to look out for their interests.

Simmons said his family quickly realized 529s were their best savings option, given the amount they expect college will cost their children. Still, Simmons said he hopes the information investors need will be packaged more clearly. To him, investors need more education before investing in education.

Copyright © 2004 The Seattle Times Company

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