A Costly Lesson in College Savings

"At its worst, the complexity of the cost structure and the reluctance to make the information easily accessible amount to deceit on the part of 529 providers," McNeela told subcommittee members at the recent hearing.

Susan Dynarski, an assistant professor at the Harvard University Kennedy School of Government who specializes in tax and education policy, recently assigned a student to compare the fees charged by all of the 529 plans.

Dynarski called a halt to the assignment, however, because with so many fees with so many different names, there was virtually no way to compare them. "If a Harvard undergraduate cannot comprehend the fees," she said, "then something needs to be done."

She holds little hope that the average American family struggling to work and raise children can find the wherewithal to comparison-shop 529 plans.

Hidden Performance

Most 529 plan options consist of funds run by the major mutual fund companies. Yet consumers have no quick or easy means to compare performance as they can with mutual funds.

An estimated $2.8 billion has been invested in Putnam funds through Ohio's CollegeAdvantage plan, which offers more than a dozen options and reflects as many as six commission fee structures. Many of its age-based funds, a popular 529 investment mix that reduces exposure to stocks and increases bonds and fixed income as a child ages, are showing minuscule or negative returns.

For example, the fund geared for children born in 2000 has lost, depending on the fee structure, between 0.94% and 2.05% annually for the past three years ending April 30, according to Morningstar. For students born in 1986 and about to enter college, the fund has earned, depending on fees, between 0.11% and 1.67% annually for the same period. By comparison, TIAA-CREF offers a stable-value fund that guarantees no loss of principal and is currently paying about 3% annually.

While 529 participants currently receive performance information on individual investments, they should see the performance of comparable benchmark investments next to their own funds to understand how well -- or poorly -- their investments are doing, said McNeela.

"If this is done properly," he said, "plans saddled with poorly performing funds and high cost structures will have few places to hide."

Morningstar maintains a database on 529s plans, which it recently used to rank the best and worst plans for consumers based on several features, including quality of investment options. (See chart at end of this story.)

But the firm doesn't supply performance data on its free www.morningstar.com Web site. Greater detail on plan options and performance, however, is available on its paid Web site for advisers, for an additional annual fee of $495.

Bond Bombshells

Many families choose to invest in age-based funds -- usually a mixture of several mutual funds. These funds contain more stocks when children are young, then shift to bonds and cash as they near college age, mirroring a classic investment strategy of capital growth in the early stage and capital protection in the late stage.

But now, with interest rates rising from their lowest point in four decades, some of these age-based plans could generate an unwelcome, unexpected and unprofitable outcome for families with high-school age students, according to some financial advisers. That's because bond prices fall as interest rates rise.

If an age-based plan for older children is heavily laden with bonds, particularly with the wrong kind of maturities, "People will see their principal erode," said Candace Bahr, a managing partner with Bahr Investment Group in Carlsbad, Calif. "People are going to be blindsided."

Matthew S. Olver, a certified financial planner with Spero-Smith Investment Advisers in Cleveland, said that some bond funds contained in age-based plans already are starting to lose money. If interest rates continue to rise, the losses will increase.