When it comes to choosing a 529 plan, families need to pay attention to the particulars including investment options and state tax credits. In addition, families need to be aware of high 529 fees they could end up paying. Some plans can have high fees. These fees have caught the attention of the Financial Industry Regulatory Authority Inc. (Finra) who is launching an investigation into brokers who are recommending certain high fee 529 plans that don’t benefit their client.
529 portfolios have a range of investment options including mutual funds or CDs. The choices vary depending on how much risk your clients are willing to take on as well as how long they are going to be saving. Families can open a 529 plan either directly from the state or through a broker. Broker-sold plans can sometimes have more aggressive investment options like stocks and as a result can have higher costs associated with them. The aggressive investing does not always offset the potential tax savings and the higher fees.
529 Share Classes
When choosing a broker-sold plan, be sure you are recommending the right plan for your client. 529 plans have three different share classes–A, B, and C. A and C are the most often used ones. Class A is used for long term investors. The highest fee is paid up front, and the fee decreases over time. Because the fee is taken up front, a 5% fee on $1,000 deposit would result in a $950 investment into the fund.
Class C is intended for a more short term investor. The fee is not imposed up front so a $1,000 deposit would be a $1,000 investment. However, the annual expense is higher than Class A and makes it more costly over time.
The danger with broker-sold plans (and the reason for Finra’s interest) is that brokers are recommending Class C choices with the knowledge that their client is investing for the long term. Brokers may not be aware of this error so Finra is asking them to voluntarily report their past suitability mistakes. “It wants firms to ensure investors are getting the right investment to fit their needs.“
How to choose between direct- and broker-sold plans?
In general, we recommend to our clients to buy a direct-sold plan. As CERTIFIED FINANCIAL PLANNERS™, we always act in the best fiduciary interest of our clients and do not collect commissions or fees on the 529 plan.
In the majority of cases buying the direct-sold plan will keep more money in the investor’s 529 plan. A broker-sold plan’s return on investment will generally not justify the increased fees, and the higher fees have the net effect of losing any tax benefit you receive. Be sure you clients are reviewing their options and making an informed decision on what is best for them and their family.
Can you rollover a 529 plan?
Your clients can choose to move their funds from one 529 plan to another, and sometimes can do so without penalty. If they rollover funds from one plan to another for the same beneficiary, they will not face penalty or taxes. However, they cannot have rolled over funds for that beneficiary within the last 12 months. If they move funds from one plan to another and change the beneficiary, they will face no penalty if that new beneficiary is a member of the previous beneficiary’s family. Check out our blog 11 Secrets You Didn’t Know About 529 Plans.
What if I don’t know anything about investing?
Choosing an age-based direct-sold plan has become a popular choice for investors. They offer professionally managed approach to investing that gradually moves from more stocks to more bonds as your client’s child gets closer and closer to college. With most plans your client can simply decide whether they’re aggressive, conservative, or somewhere in between, and then their 529 plan will invest their money based on their child’s current age with an appropriate risk adjusted mix of the funds. As an advisor, you want to make the most of your client’s investment. An age-based direct sold plan offers a low cost way of getting the most bang for their buck when it comes to 529 plans. Looking for an easy way to compare plans? Visit our friends at www.SavingForCollege.com.