I've noted that a key part of making the most on your investments is to avoid as many associated costs as possible. The same thoughts hold true when investing your college savings in 529 plans -- the more costs you can avoid, the better your investment will perform.
One major cost with 529s can be brokerage selling costs/fees. I say "can be" because you can usually purchase 529s directly from the state without incurring any broker's fees. Here are the details from Bankrate:
When you purchase a 529 plan through a broker, the broker receives commissions, paid for by you directly through sales charges and/or indirectly through additional expenses attached to the investment. You will avoid these costs by going to a 529 plan and opening your account directly. Each 529 plan has a Web site containing an official program description and other enrollment materials, and most of the "direct-sold" plans allow you to easily enroll online and make contributions via electronic transfer from your bank account. You might also locate 529 plans through the Web sites of the mutual fund firms, including the firms mentioned above, that are hired by the states to manage their 529 plans.
Ok, so if it costs more for the EXACT SAME INVESTMENT, why would anyone EVER buy a 529 from a broker? Thoughts on this:
Should you go the direct route or the broker route? The answer depends on your ability to understand and select 529 plans and other investment vehicles, as well as the amount of time you are willing to spend investigating your options. Many parents, and especially grandparents, decide to involve a financial professional and don't mind paying the extra costs associated with broker-sold 529 plans. You may also wish to consider that broker-sold 529 plans tend to use actively managed mutual funds in their investment options while many of the direct-sold 529 plans use index funds.
A few thoughts on this:
1. The translation of that last sentence is "not only will you likely pay more up front for a broker-sold 529, but the funds you'll get from it will probably be more expensive making your total return even worse."
2. Consider the extra amount you pay a tax on ignorance. Yep, it's easy to learn about personal finances, but if you don't want to take the time and effort to do so, you're probably going to pay more and get less on lots of items.
3. I bought my 529s directly from the state of Michigan. Not only did I save fees by going direct, but I also got one of the best plans in the U.S. as well as a nice state tax deduction.
4. For more thoughts on 529s, see 529s Are the Undisputed Kings of College Savings.
When it comes to personal finance, ignorance is very expensive indeed. But so are obsolete habits.
Every state 529 plan web site I've ever been to has been very easy to understand. You can never go too far wrong by picking the age-based option, that grows more conservative as the child approaches matriculation. I don't see how a "financial professional" could possibly make it any easier.
Buying 529s through brokerages clearly doesn't have a leg to stand on, so why does Bankrate make any allowance for it at all? My guess is to avoid offending readers who have already made the mistake. They're afraid to just come right out and say that the parents and grandparents who involved a salesman in the process were wrong to do so, and wasted money as a result.
Posted by: Matt | October 05, 2007 at 10:22 AM