RIAs overwhelmingly back 529 college plans despite high fees and vanilla investment options

Although the vast majority of RIAs have significant concerns about 529 plans they are willing to set aside their qualms and recommend them to clients. See: Fidelity study reveals greater reliance on advisors to manage the college savings vs. nest egg vice grip.

In fact, a survey released Monday shows that although 88% of responding RIAs have a number of problems with traditional 529 plans, including the quality and selection of the investment options as well as their fees, 95% still recommend them to clients.

The February study from Tuition Plan Consortium, a group of 270 U.S. private colleges and universities that own and operate the Private College 529 Plan, shows that more than 53% of RIAs surveyed are concerned about the quality and selection of investment options in 529 plans. Among other concerns, 34% of those canvassed cite exposure to market volatility and 28% point to fees in these plans.

Locked in

Nancy Farmer: RIAs don’t like the
fact that they can only change
investment options once a year.

RIAs have legitimate concerns about traditional 529 plans including investment options, steep costs and inability to change allocations more than once a year, says Nancy Farmer, president of the Private College 529 Plan, which is part of the consortium that conducted this study.

Her firm surveyed 113 RIAs at the TD Ameritrade Institutional 2012 National Conference last month. The Private College 529 Plan sells a prepaid 529 plan that lets parents lock in college tuition for one of the consortium’s colleges or universities at today’s prices. See: TD Ameritrade brings some Florida heat to the RIA winter.

Farmer says 34% of RIAs are especially leery of traditional 529 plans because of the market volatility.

“RIAs don’t like the fact that they can only change investment options once a year, particularly with how volatile the markets have been,” Farmer says.

Rick Darvis, co-founder of the Plentywood, Mont.-based National Institute of Certified College Planners, agrees that 529 plans don’t offer much flexibility. In fact, if money is withdrawn for anything other than education, participants are penalized. He encourages parents to consider plans such as conventional or Roth individual retirement accounts, which can be used as saving vehicles for college costs and that also receive tax advantages.

Not on the menu

But 529 plans have improved in the last few years, contends Laura Lutton, editorial director in fund research group at Chicago-based Morningstar Inc..

“We’ve seen fees come down pretty dramatically in 529 plans and it’s even more dramatic among direct-sold 529 plans, which are the ones that RIAs tend to direct clients toward,” she says.

Lutton concedes some RIAs may not find all of the investment options attractive in the direct 529 plans, which she says are a bit more “plain vanilla.” RIAs who would like to spice up their clients’ 529 plans with alternative investment options will be out of luck since most 529 plans don’t include them, she adds. Many RIAs either purchase the 529 plans for clients or give them instructions about how to purchase them directly.

By their nature, Lutton says, 529 plans are created with easy-to-understand funds so parents can put their child’s assets in an age-based account which changes allocations as their child gets closer to college age.

“They don’t have as many specialty plans because they’re set up to be more foolproof,” she says. “If you’re a sophisticated investor you probably don’t want an age-based option where the allocation and underlying investments have been chosen for you.”

The average advisor-sold investment option cost 1.47%, while the average direct-sold option charged just 0.54%, according to a Sept. 30 white paper by Morningstar.

Preston Byers: High fees give the
529 plan — which is a
really great idea — a really
bad name.

State to state

Savingforcollege.com, a group that tracks these costs, found that fees varied wildly over a 10-year period from state to state and within states.

According to this analysis, the cheapest 529 plans options can be found in Louisiana — one of which would be free over 10 years. Its second-lowest option would cost participants just $78 over 10 years. Louisiana’s most expensive option would cost participants $567 over 10 years.

On the other end of the spectrum, the District of Columbia is considered to have the steepest fees, with its cheapest option setting back participants $778 over 10 years and its most expensive option costing participants $2,529 over that span.

The organization also tracks 529 plans by performance, and lists Alaska as the state with the best track record over the last three years.

Worth the confusion

There’s no question that 529 plans are costly and confusing to parents, acknowledges Preston Byers, an LPL advisor with ClearBridge Wealth Management. His firm manages about $140 million in assets, 98% of which are fee-only and are held at LPL’s corporate RIA.

“Every state has a 529 plan and it’s very confusing for parents to know which one to choose. They tend to sit on their hands and do nothing,” Byers says. “The fees are high and unfortunately it gives the 529 plan which is a really great idea — a really bad name.”

He reminds clients of the numerous tax advantages of 529 plans including the fact that participants aren’t taxed for the earnings on the fund. Some states offer additional tax credits to residents as well.

Byers owns three 529 plans and says that 60 of his 100 clients have 529 plans with some clients owning more than one.

Not a moneymaker

There’s no question that 529 plans are costly and confusing to parents, says Byers, who admits he doesn’t like to charge clients to set up 529 plans, and typically gives them the information about how to set up the account and answers questions along the way.

Keith Curtis, of LCM Capital Advisors LLC, who holds his assets with broker-dealer JHS Capital Advisors LLC, also doesn’t typically charge clients for setting up 529 plans.

“These are not a big payer, but at the end of the day, we use it because it’s part of an overall plan,” he says.

While the fees aren’t as low as he’d like, Curtis still believes 529s are a great place for clients to start saving money for college. “At the end of the day, you’re not going to get away from the fees,” he says. “I think they’ve stayed pretty reasonable. You have to start somewhere.”