Choosing 529 Plans: “Where Do I Start?”
By: Arman Rousta
The hardest part about saving for college is just to start doing it. Where to begin? Well, if you have not heard the news yet, 529 College Savings Plans, tax-free funds that have been made possible by laws passed in 2002, provide the best opportunity to meet the growing cost of college. Marketing of 529 plans has picked up, as you may have noticed, but this usually leads people down the wrong path. The way fund managers typically market their plans is as if they were the only plans available. This is a very tricky tactic yet it works because these plans are so new and most people are not aware that there are over 80 plans and more than 1,000 investment options to choose from. Let's give credit where it is due to the fund managers. They have spent millions of dollars in advertising, which raises awareness and touches on the dreams that parents have for their children, not to mention adding a little twist of guilt for those who have not paid attention to education planning.
One Plan versus Multiple Plans
So now that we've established that 529 plans are generally the best way to go, where do parents start in the process of choosing 529 plans? First of all, let's get one thing straight up front. You do not need to invest all of your money in any one plan with one fund manager. In fact, it makes all the sense in the world not to put all your eggs in one basket, when there is no penalty for diversifying, except the extra time that it takes to enroll in and then track multiple accounts. This is a very important point to remember, especially since most plans market theirs funds as if they are the only show on earth.
Sources of Advice on 529 Plans
Where do you go for help on narrowing down the playing field, from the 80+ plans and 1,000+ investment options? Below we take a look at your realistic options.
How about going to the bank? Try again. Most banks either promote a limited number of plans or none at all. It just doesn't fit into their financial model unless they own a brokerage division that can promote its own 529 plan, in which case your choices are usually limited to that offering.
What about a financial advisor? Sure, if you don't mind paying hefty commissions or you have great trust in your advisor. But don't forget that almost all advisors are paid on commissions, for gathering more of your assets. Plus, most advisors are restricted or affiliated with certain plans, which means you will not be given objective advice on the whole universe of 529 plans. If your advisor works for a firm that offers their own 529 plan, you must really do your homework independent of the advisor prior to making any decisions. Make sure you understand the relationship that an advisor has with the particular funds that he or she recommends beforehand as well.
Maybe the government will help in some way? Wrong. States have too much to lose if they recommend anything but their own plans, evidenced by the fact that they are partnering with fund managers who promote their state plans nationally. You see, the states all get a piece of the pie for assets that they bring into their 529 plans. The federal government is just happy to see assets flowing into this new investment vehicle and does not want to get involved in disrupting the competitive environment between fund managers and states. Let em' duke it out and compete for dollars. After all, that is the American Way, no?
Your accountant must be the answer, right? Nice try but no dice. Although this would be a great source of 529 plan advice, most accountants simply have not taken the time to grasp and study the 529 plan marketplace and therefore will be prone to giving limited, incomplete advice. Over the years, this may change, but you need guidance now! As long as your accountant has remained objective, meaning that they have not started selling mutual funds to their clients, and they have truly studied 529 plans, beyond reading a few articles, then you may be in good hands. But again, this is a rare case.
How about magazine and newspaper press? The press really does play an important role when it comes to providing unbiased feedback on various topics. However, the criteria that have been used by various papers and magazines are not typically sound nor devised by financial experts. Further, many press sources are led astray by depending on the wrong types of industry experts (i.e. those who have significant bias) when gathering information for their articles, which is passed on to readers. In our estimation, about one out of every five articles on the topic of college planning or 529 plans comes out with useful and accurate information. Hopefully, as editors and writers continue to become educated on this topic over time, the content of their articles will be more useful for readers. As a final note on magazines and newspapers, don't forget who keeps their doors open - that's right, fund managers and financial services companies are among the most prominent advertisers in these print media channels, so bad-mouthing them would not be an economically prudent move from the viewpoint of the editorial staff.
So what about Independent research companies and websites? There are a growing number of websites that provide data on 529 plans. A site called www.401kid.com was one of the first among these sites and is a worthy source of objective data. The most popular site for 529 plans is Savingforcollege.com (SFC), which is solid when it comes to information but comes up short when it comes to giving advice. You see, since SFC essentially serves financial advisors and earns advertising revenues from the 529 fund managers, it must be careful when it comes to giving advice, positive or negative, on plans. Basically, SFC doesn't want to bite the hands that feed it, so you are not likely to see them endorse any one plan over another. All that being said, SFC is still a good source of information. Morningstar is the king of mutual fund ratings and they are also providing 529 plan reviews. However, there tools are again geared towards advisors, so families cannot benefit directly from using them.
Questions to Ask When Researching 529 Plans
Regardless of where you go for advice, make sure that it is objective by asking the following questions of your source:
- How are you compensated for giving this advice or endorsing plans?
- What is your business relationship with 529 plan fund managers?
Whether or not you have opened one or several 529 plans, it is advisable that you spend some time once or twice a year reviewing your investment strategy and considering if you are on the best path.
When You Are Ready to Open an Account
Most plans have online enrollment and account monitoring available. If not, you may check in with www.401kid.com/529-plan-wizard.html to download the appropriate enrollment forms, which you would then send with a check to the fund managers of choice. Even if you don't enroll online, you can still view the performance of your funds online in 95% of cases.
With the markets fluctuating the way they have, be careful not to be too reactive when it comes to making changes to your investment strategy. Too often, investors fly by the seat of their pants and go for the hottest funds or what they read in Kiplinger's last month. Remember, the past does not equal the future and what a fund did over the past year has little bearing on what it may do in the upcoming year. It makes more sense to use the criteria discussed above in the 529 Plan Rankings Methodology, as your guide post for your 529 plan strategy.