Some 529 college savings plan fees likely hit bottom

After demanding a reduction in administrative and investment costs, some states are now offering plans with such low fees that they are barely profitable for managers, one expert says.
OCT 25, 2013
The fees investors pay in their Section 529 college savings plans may have hit bottom in certain states. Over the past decade, states renegotiating the management of their 529 plans have demanded a reduction in administrative and investment fees associated with the tax-advantaged plans. Some states are now offering plans with such low fees that they are barely profitable for program managers, Andrea Feirstein, managing director of AKF Consulting, said at the College Savings Foundation national conference in Savannah, Ga., on Wednesday. Those plans include the direct-sold programs offered in New York, South Carolina and California, she said. Utah's plan also has very low fees, though it is unique in that the state administers the program itself. New York's plan is managed by Upromise and The Vanguard Group, South Carolina's plan is managed by Columbia Management Investment Distributors and California's plan is managed by TIAA-CREF. "Fees there can't go any lower because there would be no room for the program manager to make any money," Ms. Feirstein said. With direct-sold plans, the fees charged are very important to the states because the media and organizations like Morningstar Inc. regularly compare plans based on fees, she said. (Also: Regulator pushes for more fee disclosure from 529 plans) It's not as big a focus when comparing adviser-sold 529 plans because it's expected that there would be a premium paid for the adviser's services — and advisers typically demand a lot of investment choices, she said. Paul Curley, Strategic Insight's director of college plan research, said he could see fees of some plans decrease as they boost assets because the cost of running the plans falls as assets increase. And assets industrywide are on the rise. Last year, total assets in 529 plans jumped 21%, to end 2013 with about $191 billion, according to Strategic Insight. (See all 529 plans ranked by total net assets) Deborah Goodkin, First National Bank of Omaha's managing director of college savings plans, said program managers often can charge lower fees if the investment choices offered by the plan are all or mostly all from that provider. But most advisers look for 529 plans that offer many different investment managers so they can choose investments they think are top of the line, she said. In the Nebraska Education Savings Trust adviser-sold plan run by First National, advisers particularly like the inclusion of iShares and Vanguard exchange-traded funds, Ms. Goodkin said. The bank took over that plan in 2010 and cut costs by 55%, she said. Ms. Feirstein said not all state plans had lowered fees enough. "That's not to say there aren't plans that could catch up," she said.

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