A Costly Lesson in College Savings

The agency also offered an illustration of how much of an impact fees can have on 529 investment performance. It compared the cost of investing $10,000 in the low-cost Utah Educational Plan Trust and the same amount in the similar but higher-cost Rhode Island JPMorgan Higher Education Plan for 18 years, assuming an 8% annual return. Over the period, the Utah plan would yield $7,728 more, for an eye-popping difference of 20.7%.

Last month, Putnam cut fees on its 529 plans. On May 24, Ohio added funds by the respected low-cost mutual fund Vanguard Group as an alternative.

Commission-Crazy

An estimated 80% of the money invested in 529s arrives via an army of stock brokers and financial advisers who are paid commissions as high as 5.75% of the funds invested. Plans listed as paying that top commission have included Pennsylvania's TAP 529 Investment Plan managed by Delaware Investments, and one of Nevada's several plans, the American Skandia College Savings Program managed by Strong.

Bob Veres, editor and publisher of Inside Information, a newsletter for financial advisers, says if states really put consumers first when selecting 529 managers, then each would offer the low-cost Vanguard or TIAA-CREF family of mutual funds, which can be purchased without brokers and commissions.

"Somehow, some way, the states have opted for the dark side," he said.

Joe Hurley, a Pittsford, N.Y., CPA and national authority on 529s, defended the use of sales forces. "Brokers are introducing 529 plans to people who wouldn't otherwise make the effort," he said.

Hurley's Web site, www.savingforcollege.com, contains a wealth of information and serves both consumers and advisers. Families can sign up to get names of advisers who work in their area under a section entitled "Find a 529 pro in your zip code." The site, however, states it cannot vouch for the advisers, who pay a minimum $495 annually for the listing and must first pass a test on 529s.

Bob Levy, an employment law attorney with a large Southern California firm, said he didn't mind paying a commission to invest through a friend, who happens to be an Allstate agent, in Virginia's highly rated 529 plan, managed by American Funds.

"This looked like a wonderful vehicle," Levy said, "but I didn't have the whole thing nailed. The key is getting the money in there and letting it go to work." His son was already in high school and time was running out, so he chose an option in which the commission was reduced the longer he held the account.

Disclosure vs. Deceit

Some state plans are dysfunctional or downright evasive when it comes to disclosing important information to investors, information that federal regulations routinely require of mutual funds.

The National Association of Securities Dealers is investigating whether 15 broker-dealers sold 529 plans to out-of-state residents without disclosing that the prospective investors would lose income tax deductions by not selecting their home-state plans instead.

Some 529 managers do as much as 90% of their business with customers from other states, according to an NASD spokeswoman. It is not illegal for a state plan to sell to out-of-state customers. At issue is whether the recommendations were suitable and customers knew their options, as well as the consequences of their decisions.

Because of the exemption from SEC regulation, 529s are not subject to the same fee-disclosure requirements as other investment products, like mutual funds, which actually make up most college savings plans. In most cases, the fees are difficult to find, according to Bullard of Fund Democracy.

In Maine's 88-page NextGen College Investing Plan, for example, a difficult-to-decipher discussion of fees doesn't crop up until page 43. Alaska's Manulife College Savings Plan doesn't broach the touchy subject until page 45 of its 61-page disclosure document, Bullard noted.