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Should You Open a College Savings Account?

NEW YORK ( TheStreet ) -- For a decade, fund companies have been marketing 529 college savings plans. But the financial crisis took a big toll on the plans. In 2008, the average plan lost 24%, according to Morningstar. Reacting to the big losses, politicians charged that the plans were too risky. Some critics argued that the fees were excessive for plain-vanilla investments.

Since the financial meltdown began, plans have taken steps to improve. Many 529 plans have cut expenses. Some funds have lowered risks. "In the last 12 months, 529 plans have become more compelling investments," says Laura Pavlenko Lutton, a Morningstar analyst.

Named for Section 529 of the Internal Revenue code, the plans have $119 billion in assets. The plans are designed for families who want to sock away money that can be used for college tuitions. Under the system, states sponsor plans and hire money managers to oversee the assets. Big players in the business include fund companies, such as Fidelity Investments, Franklin Resources (BEN - Get Report), and T. Rowe Price (TROW - Get Report). The 529 investments typically cost a bit more than comparable mutual funds, but savers like the plans because of the tax advantages. Earnings of the plan investments are not taxable -- provided the money is used to pay for education.

The wave of cost cutting began in December 2009 when Fidelity shaved its total annual fees on some investment options from 0.80% to 0.60%. Vanguard reduced its costs from 0.44% to 0.25%. Many other companies joined the cost-cutting spree.

Besides reducing expenses, some plans have sought to reach nervous parents by offering safer investment choices. TIAA-CREF rolled out conservative funds that have big allocations to fixed income. Plans sponsored by Massachusetts and other states offer FDIC-insured investments.

Should you open a college savings account? That depends on whether you think your child will attend college. If the child does not enroll, you could owe Washington a 10% penalty on the money that has been put into a college fund. Still, many states offer considerable incentives for families to participate in the 529 plans.
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