A state-sponsored Section 529 plan is one of the best options for college savings. But shopping for one is a hassle, like buying life insurance or annuities. It’s hard to make an apples-to-apples comparison.
That’s why lots of families turn to financial advisers. But many “broker-sold” 529s have a serious downside: high fees that can undermine growth. In fact, fees can be a serious issue with “direct-sold” 529s as well, even though there’s no adviser commission when you buy directly from a mutual fund company or brokerage.
So how do you navigate through these hazards? After all, 529s can be a terrific deal, allowing investment gains to be withdrawn tax-free for approved college expenses.
Broker-sold and direct-sold 529s each have pros and cons. Plans sold by brokers generally come with up-front commissions, or “loads,” from 1% to 5.75% of the invested amount, according to a survey by Savingforcollege.com. That cost can be avoided entirely by going the direct route.
In addition, broker-sold plans tend to have higher annual fees, or “expense ratios,” the Savingforcollege.com survey finds. One reason is that plans bought through brokers are less likely to invest in index-style mutual funds, which offer rock-bottom fees, instead emphasizing actively-managed funds that charge more.
On the other hand, broker-sold plans come with expert advice, while direct-sold plans don’t. The higher fees compensate the broker or financial adviser for figuring out which plan suits your family best. The expert should know, for instance, whether your state offers tax breaks on contributions for residents. That could be a plus for the in-state plan. Some states offer matching contributions, scholarships or other forms of financial aid, but only to residents that go with the in-state plan. Of course, these benefits would not tip the balance if the plan has provided poor returns.
And there’s another downside to broker-sold plans: conflict of interest. If advisers will earn more steering you to one plan, they may steer you away from another that would suit you better.