Q: We recently changed financial advisors and are now putting away money for our grandkids in a different 529 fund. Previously, the fund was "CollegeBound" managed by "National Planning Corporation." The quarterly statements never listed any investment costs.
Now with our new financial advisor's recommendation, we are investing with Franklin Templeton Investments in the "Franklin Templeton 529 College Savings Plan" and are paying an initial 3.5% each time we invest.
We never saw any costs associated with investing with "CollegeBound". You recently recommended taking a look at California's 529 college savings plan called "ScholarShare". The most that any of the ScholarShare plans charge is summarized as an annual "Total Annual Asset Based Fee" of 0.61 percent (most charge .3 percent or less).
My question: Is 3.5 percent a reasonable fee for each monthly investment? I did ask our advisor about it, but her response didn't make sense at the time and I wasn't aware of the Scholarshare plan with its documentation detailing expenses.
Thanks, Papa - Roseville
A: A 529 Plan is an education savings plan operated by a state or educational institution designed to help families set aside funds for future college costs. It is named after Section 529 of the Internal Revenue Code, which has been in existence since 1996.
California's ScholarShare program is managed by TIAA Cref. There are typically two ways of investing in a 529 plan: Direct-sold 529 plans, which is a do-it-yourself way of investing, and institution/broker-sold plans.
The direct-sold plans allow for much lower management fees and are free of broker-originated sales charges, often called loads. With a direct-sold plan, you are solely responsible for fund selection.
The other way of investing is through your broker or financial institution. This option generally allows for a broker or financial advisor to analyze your investing time frame, risk tolerance and other personal needs. The advisor will then make the appropriate choices for your situation.
From a cost standpoint, the 3.5 percent fee you reference is the sales load you pay each time you buy units of the funds chosen. Purchasing funds and paying a sales load during each contribution may greatly reduce the accumulation potential of your minor's account.
In California, you can make contributions to a 529 plan until all accounts for a single beneficiary reach $350,000. However, contributors should also take into account the annual federal tax guidelines on monetary gifts.
There is little doubt the cheapest way of investing in a 529 plan is the ScholarShare program. Just be aware that cheaper is not always better.
Ask your advisor for a detailed college planning analysis of the least expensive/most effective options. These should include a 529 plan, a Coverdell Education Savings Account and qualifying U.S. savings bonds, which are tax-deferred for federal and tax-free for state.