NASD Expands 529 Plan Probe

The industry organization that regulates securities brokers has expanded its investigation into firms selling the popular -- but much criticized -- 529 college savings plans, while issuing a new consumer alert brochure to help families better choose from among the dizzying number of options.

The National Association of Securities Dealers, or NASD's, new Investor Alert, College Savings Plans -- School Yourself Before You Invest, reflects continued concern that the average investor faces considerable difficulty in navigating the industry's complicated world of fees, expenses and tax incentives.

The NASD is now investigating 20 brokerage firms, whose representatives sold a high percentage of out-of-state 529 plans to clients. "We're concerned that those investors may be missing out on some important state tax benefits," said Mary Schapiro, NASD vice chairman.

As of May the NASD was investigating 15 firms. The investigation began with six firms in the summer of 2003. To date, the NASD has taken no public action, other than to issue the consumer brochure.

College savings plans, offered and run individually by all 50 states and the District of Columbia, allow families to invest in mutual-fund-style programs that provide significant federal tax breaks. Half the states offer tax incentives as well.

More than $50 billion is invested in 529 plans, which are named after a section in the federal tax code. More than three-fourths of the funds invested are placed by brokers who receive a sales commission.

The new brochure provides a comprehensive look at plans with state tax breaks offered by 25 states and the District of Columbia, as well as advice for comparing plan fees and expenses. This alert joins other NASD investor education college saving resources on the NASD's Web site, including the brochure Smart Saving for College and the 529 Plan Expense Analyzer.

In recent months, a growing number of federal legislators, regulators and financial analysts have criticized the plans for their high fees and commissions, absence of disclosure and needless complexity. Earlier this year the Securities and Exchange Commission launched an investigation into the plans as well.

"The good news is that there's no shortage of plans available -- every state offers at least one 529 plan, and there are currently more than 80 college savings plans to choose from," said Schapiro. "But no two plans are the same. Fees and expenses vary greatly, and high fees and expenses can cut significantly into your returns, so you have to choose carefully."

>To order reprints of this article, click here: Reprints