(MoneyWatch) When you buy a car you want to know the list price. It's the same with a home purchase. But when parents shop for a 529 college savings plan, they rarely think about what it's going to cost them.
That's a shame because when you're investing for this big-ticket item for your children, costs are just as important. Here's why:
You can't control what kind of investment returns your 529 plan. Most parents don't understand that a 529 plan's cost is going to be the most important factor in whether the investments do well over time.will generate. Nobody, after all, knows ahead of time how the stock and bond markets will behave. You can, however, control your costs by choosing an inexpensive
Paying Attention to 529 Plan Investment Costs
Unfortunately, it can be particularly tough comparing costs among 529 college savings plans which 49 states offer.
Morningstar, the investment research firm, however, has done the work for you. The firm conducted an in-depth industry survey that includes an analysis of the underlying investment costs of every 529 plan. Not surprisingly, 529 plans that are heavily reliant on low-cost index funds shot to the top of the list. Here's where you can read the report, Morningstar 2010 529 College-Savings Plans Research Paper and Industry Survey.
From the Morningstar report I pulled the names of the cheapest and most expensive 529 plan investments that the research firm identified by using asset-weighted expense ratios. An expense ratio refers to the percentage of your 529 investment that is deducted from your account to pay the fund's sponsor.
For instance, a $25,000 investment account in the New York 529 Plan, which sports the nation's lowest 529 expense ratio, would generate a total yearly fee of $62.50 for its owner in one year. In contrast, $25,000 invested in South Dakota's 529 investment choices would generate a fee of $462.50. That's a stunning difference.
10 Lowest Cost 529 Plan Investments
- New York's 529 Plan (Direct) .25%
- Utah Education Savings Plan .28%
- Nevada Vanguard 529 College Savings Plan .28%
- Ohio CollegeAdvantage 529 Savings Plan .29%
- College Savings Iowa 529 Plan .34%
- California ScholarShare College Savings Plan .37%
- Michigan Education Savings Program .40%
- Colorado CollegeInvest Direct Portfolio .42%
- Virginia Education Savings Trust .42%
- North Carolina National College Savings Program .45%
10 Most Expensive 529 Plan Investments
- South Dakota CollegeAccess 529 1.85%
- Ohio BlackRock CollegeAdvantage 529 Plan 1.77%
- Maine NextGen College Investing Plan 1.76%
- Nebraska State Farm College Savings Plan 1.76%
- Iowa Advisor 529 Plan 1.75%
- NJ Franklin Templeton 529 College Savings Plan 1.74%
- Alaska John Hancock Freedom 529 1.70%
- New York 529 Program (Advisor) 1.70%
- South Carolina Future Scholar 529 (Advisor) 1.69%
- Nevada Columbia 529 Plan 1.68%
Let me state the obvious: You should end up with a bigger kitty for your child's college years if you invest in the lowest cost 529 plans. Expenses matter -- a lot.
Disclosure: I occasionally give talks about college planning for families with teenagers on behalf of Fidelity Investments that operates the California ScholarShare College Savings Plan.
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