Floundering 529 Plans

Rhode Island said its 529 plan will scale back some investors’ exposure to stocks when market turbulence picks up.

College-Saving Plans Shift to Keep Parent From Becoming Dropouts”; The Wall Street Journal (10/11/2011)

Even with one of the last great tax breaks out there — zero taxes on any capital gains — so-called Section 529 plans aimed at helping parents save for their kids’ college tuition have been sort of a dud.

Instead of attracting hundreds of billions as one might expect, such funds have only a fraction of that amount under management — and are susceptible to dramatic  drops in contributions, such as the 63% drop from 2007 to 2008.

What gives?

As the parent of young kids and a natural constituent of such plans (I’ve demurred so far), I see two main problems:

One.  The plans are administered by financial rubes.

Exhibit A:  Rhode Island’s administrators, who have decided to sell stocks after they’ve just taken a 20% hit (see quote above).

Two.  They charge too much.

Fat Fees, Volatile Performance

Investors who simply want to mirror world equity markets can park their money at Vanguard for something like 15¢ (or less) for every $100 on account.

That equals an expense ratio of .15% — and no, that’s not a typo.  

The equivalent fee in the 529 plan world — assuming you can find such an investing option or cobble it together — is easily 4x to 5x that.

Note that my two knocks aren’t even the ones most 529 plan critics cite.

Those would be:  1) the plans misrepresent the benchmarks they’re supposed to be tracking; and 2) they’re stuffed with so many choices these days that they leave parents with what the industry calls “investor inertia.”

On top of all those, there’s this last one:  capital losses are non-deductible.

About the author

Ross Kaplan has 19+ years experience selling real estate all over the Twin Cities. He is also a 12-time consecutive "Super Real Estate Agent," as determined by Mpls. - St. Paul Magazine and Twin Cities Business Magazine. Prior to becoming a Realtor, Ross was an attorney (corporate law), CPA, and entrepreneur. He holds an economics degree from Stanford.

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