Yesterday, I received the following note:

Hi Helen –

My name is Lynne Ward and I’m the Executive Director of the Utah Educational Savings Plan (UESP). Your blog was discovered by one of our staff members and of course, we’re all very happy that you chose UESP over any other 529 plan. I am very impressed by the level of analysis you did in making your decision. Our account owners’ due diligence ranges from the man who read Money magazine’s recommendation of UESP while he was laying on a beach in Hawaii  - –  to you, who actually read the Program Description!

Your category of the Program Documentation may be “geeky” as you say, but we try very hard to ensure that it is clear and complete. It is gratifying to know that our hard work results in a better educated investor and new college savers.

Welcome to UESP and if you ever want to communicate with me directly, please e-mail or call me.

Thanks so much,

Lynne

Lynne Ward

Needless to say, I’m terribly impressed by anyone who takes the time to contact a little blog like mine.

Before becoming director of UESP in 2004, Ms. Ward was the Deputy Chief of Staff to the Governor of Utah.  Under her leadership, UESP net assets have increased from $0.8 B to $3.3 B — not bad for a state with a population of 2.7 M.  Put another way, New York, with a population of 19.5 M, has $8.4 B in its investor-directed 529 fund, or about $430/person.  California has a measly $3.3 B/36.9 M residents or $89/person.  In contrast, Utah has $1,222 per capita in its 529.  Of course, some of that dinero comes from out-of-state investors (like me), but it is indicative of a well-run fund.

With regard to the Program Documentation, I’ll say it again:  UESP has the easiest to read program description.  I wish the Federal Government would require a standardized description for 529 investments and fees, much like the disclosure mandated for all credit card applications.  They could do worse than adopt Utah’s documentation as the standard.

I’ll also give some extra bonus points to the UESP web interface.  The process of creating an account with automatic monthly contributions was completely smooth.

Thank you, Ms. Ward — both for your letter and for running such an investor-friendly 529 program.

More importantly, thank you on behalf of my six-year old son who today discovered the world of Tintin.  Whatever he wants to study when he reaches 18, I’ll be ready to open that door (I hope).

Image Credit: debaird at Flickr.

Tags: 529 funds, 529 plan, investing for college, UESP, utah

Susan asked:

“How does the Utah 529 plan compare to the Ohio CollegeAdvantage 529? I’m having a hard time choosing between the 2″

This is such a good question, I thought the answer deserved its own post.  So here it is.

Overall ratings: Both plans are rated well by both Morningstar and Saving for College.

Program Management Structure: Utah and Ohio are different than most 529 plans in that the programs are managed by state organizations, the Utah Educational Savings Plan Trust and the Ohio Tuition Trust Authority, respectively.  Most other states hire a financial company to do the administration.  By keeping control over the program, these states keep a tighter grip on the investment reins.

Program Management Fees: Both states offer 529 plans with low management fees.  Ohio charges 0.17-0.19% for an administration fee, in addition to the underlying expenses of the investment, which vary from 0.05 – 0.89%.  Utah’s program charges 0.22% for most of its investment options, on top of the underlying expenses of 0.025 – 0.132% .  The fees for the underlying funds are lower for Utah because it sticks to Vanguard funds; Ohio offers investments through a wider range of companies, so its top end expenses reach a bit higher, but there are plenty of good low-expense options within the Ohio Plan.

Investment Options: Both programs offer plenty of investment options.  Ohio offers 23 investment options, including four age-based options.  Utah offers 12, of which five are age-based.  Both of them offer equity- and bond-based investments.  You will likely find an appealing option in either program.

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Tags: 529 funds, asset allocation, investing for college, ohio, saving for college, utah

I’ve recently written a few posts about investing in 529 accounts.  The main conclusions so far are:

• 529 funds charge a program management fee in addition to the underlying investment expenses,
• the higher fees offset, and in some cases can negate, the savings from reduced taxes,
• the programs for states that offer tax-deductions for contributions tend to charge a higher program management fee, and
• comparing investment options is difficult because 529 funds are not publicly traded and there is not a standard reporting format or annual date for the fund’s performance calculation.

Managed funds tend to have a higher expense ratio than index funds.  Unless I can convince myself that a managed fund is worth the additional expense, index funds are a safer bet.

I’ve looked for, but not found a good managed 529 fund.  There may be one out there — if you know of one, please drop me a line.  Therefore, I’m left to choose from index funds.  This narrows down the choice, practically speaking,  to Fidelity or Vanguard, and through which state’s program?

Vanguard. Vanguard has terrific index funds with low expense ratios.  Almost half the states’ 529 programs offer Vanguard funds, but each state charges different program management fees.  We’ll look at a couple of options.

Vanguard direct. The Vanguard website directs you to the Vanguard funds as offered through the State of Nevada program.  If you purchase shares of Vanguard’s S&P 500 Index fund through the Nevada program, you will pay an expense ratio of 0.05% plus a program management fee of 0.39%.  According to a footnote at the bottom of the page, “Vanguard and Upromise have agreed to a specific formula for the allocation of the Program management fee.”  Upromise is a division of the SLM Corporation (“Sallie Mae”), which is better known for offering student loans.

Vanguard funds through Utah. The Utah program offers the same Vanguard funds but charges about half the program management fee, 0.22% vs. Nevada’s 0.39%.

Vanguard funds through Ohio. Ohio offers a similar set of Vanguard funds for a program management fee of 0.19% — about the same as Utah.

Vanguard funds through Pennsylvania. Just for fun, let’s look at one bad option.  Pennsylvania charges you 0.70% for the same Vanguard funds.

It may sound petty to whine about a 1/2 percent here or there, but over time it can really add up.   The table below shows the value of a $10,000 investment in a 529 plan for a newborn child using each of the states’ plans listed above by the time the child leaves for college, assuming a 6% annual return on investment.  You can see that Oscar from Ohio will have 9% more money than Penny from Pennsylvania, if Penny and Oscar each invest in their homestate’s plan.

Fidelity. Fidelity also has perfectly good index funds, charging low expense ratios.  At the Fidelity Website, Fidelity directs you to choose from one of its five state programs: Arizona, California, Massachusetts , Delaware, or New Hampshire.  All the Fidelity programs offer essentially the same investment options for the same program management fee of 0.15%.  The table below shows that an investment made through one of the Fidelity programs is equivalent to an investment made with Vanguard through either Utah or Ohio.

Summary: For low cost 529 index investing, good options include:

• Vanguard through Utah or Ohio, or
• Fidelity through Arizona, California, Massachusetts, Delaware or New Hampshire.

Disclaimer: The above analysis does not constitute an endorsement of Vanguard or Fidelity Funds, or their parent companies.  Read the program literature thoroughly before investing.  Investing in mutual funds involves risk and you can lose principal.

Disclosure: No investment in any company.

Image Credit: Nick Garrod at Flickr.

Carnivals: This post was included at this week’s Carnival of Personal Finance hosted at the Well-Heeled Blog.

Tags: 529 funds, Fidelity 529 funds, Vanguard 529 funds

Recently, I’ve written several posts about the fees charged by Qualified Tuition Plans, a.k.a  529′s.  To find a good program, start by looking for a low program management fee.  This is pure overhead charged by the investment company above and beyond the expenses of the underlying investments.  Fidelity charges a higher program management fee for its managed funds (0.20%) than its index funds (0.15%) — on top of the higher expense ratios for the managed fund.  We shouldn’t have to pay program management fees at all — brokerages don’t charge extra for IRA accounts.

However, fees don’t tell the whole story.  After all, you want your investment to pay a good return.  How do you compare plans?

Index Funds vs. Managed Funds

Index Funds hold investments that mimic a particular index.  Because you’re not paying for some brainiac to pick the winning companies, expenses are limited to trade execution so that the fund continually represents the index.  The largest funds are typically the most efficient.  Two of the largest S&P 500 index funds, the Vanguard 500 Index Fund (VFINX) with $93 billion under management and Fidelity’s  Spartan 500 Index (FUSEX) at $24 billion, charge a miserly 0.18% and 0.10%, respectively.

Managed funds maintain a stable of research analysts who comb the country (and sometimes the world) looking for the next Google.  It takes some hay to feed that stable, so they typically charge a much higher expense ratio.  Less than 1% is considered good, though some funds charge 2% or more.

Is the additional expense of a managed fund worth it?

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Tags: 529 funds, 529 program management fees, expense ratios, Fidelity 529 funds, FUSEX, index funds, managed funds, VFINX

Today President Obama signed into law an overhaul of the student loan program.  Since two-thirds of college students graduate with some debt, this new law will likely directly affect how you pay for your child’s education.  Notably, the new bill:

• Eliminates the subsidies paid to bank to create the loans.  This will save taxpayers an estimated $68 billion over the next eleven years.  The government has always backed the loans, so the banks have never assumed any risk.

• New loans will be issued directly by the government.  Banks will continue to service the loans, collecting payments when due.

• Loan repayment will be capped at 10% of a new graduate’s discretionary income.  I’ll be interested to see how they define “discretionary income.”  The conventional definition:  “income minus taxes and normal expenses, including rent, transportation, medical expenses…” will leave about $1.95 for most recent grads.

• After twenty years of conscientious repaying (ten years for public service workers), any balance on the loans will be forgiven — erased forever.  This will enable grads to work in relatively low-paying community service jobs, like teaching or public health, if they choose, without worrying about making enough to pay off their student loans.

• The act also directs $2 billion over four years to improve the nation’s community colleges.  The bill notes the important role that community colleges play in retraining displaced workers, helping them re-enter the workforce.  This seems like a great time to help the unemployed get the training they need.

Ending a wasteful subsidy and investing the proceeds in education — now that’s a program where everyone wins.

Well, almost everyone.  Not surprisingly, Sallie Mae lobbied for keeping the loan process in the private sector.  Sallie Mae started out as the Student Loan Marketing Association, a government-sponsored enterprise in 1972.  It became completely private in 2004.  It now operates as the SLM Corporation (SLM) with a market capitalization of over $6 billion.  SLM also owns Upromise, marketing 529 Qualified Tuition Programs in twelve states.

Image credit: Chris Radcliff at Flickr

Full disclosure: No positions in any company mentioned.

Carnival: This post was featured in this week’s Carnival of Personal Finance, hosted at The Wisdom Journal.

Tags: Health Care and Education Reconciliation Act, new student loan law, President Obama, Sallie Mae, SLM, SLM Corporation

Qualified Tuition Plans, commonly known as 529 Plans, are a great way to save for your child’s education.   Investment earnings are exempt from income tax if used for college expenses.  Unfortunately, there are often high management fees to pay on top of the expense ratios of the underlying investments.

For example, if you invest in the Aggressive Growth Portfolio in Idaho’s College Savings Program, you pay a total fee of 0.75% each year, of which 0.11% goes to the underlying mixture of Vanguard mutual funds.  The rest of the money (0.64%) goes to program management fees to Upromise and the State of Idaho.

Through the Idaho program, you pay more than five times the expense ratio for the privilege of having the money in a tax-advantaged account.

Why are there program management fees for 529′s?

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Tags: 529 plan, 529 tax deductions, funding education, investment fees

“Heresy!  Heresy!”

“Everyone knows that a 529 fund is the best way to save for your child’s education!!”

Before you throw the rotten tomatoes…

I have nothing against 529 plans.  They are a fantastic opportunity to save for your child’s college expenses.  I do, however, have a complaint against the high fees that some of the plans are charging.

In my recent study of 529 plans I came to three conclusions:

• Some plans charge exorbitant fees,
• Almost all of the plan literature is hard to wade through and compare to competing plans, and
• It needn’t be so complicated.

I set out to determine whether the high fees charge by many 529 programs offset the tax advantage.  Below is a spreadsheet I wrote to compare three scenarios.  (You’ll need to click on the image to make it readable).

Read the rest of this entry »

Tags: 529 fees, 529 funds, 529 tax advantage

My son is in first grade, and he’s already lived in three states.  He was born in New Jersey, but we moved to New York shortly after his first birthday.  New York didn’t work out, so soon after, we moved to Massachusetts.  Here, we plan to stay.

How we acquired so many accounts

In my family, nothing is more important that a good education.  Our son was born near the beautiful (but expensive!) Princeton campus, so we opened up a 529 Qualified Tuition Plan before he learned to sit up.  Ah, such enthusiastic new parents!  Unfortunately, I didn’t take any time to research the issue, and I assumed that you were supposed to invest in the 529 program sponsored by your state of residence, so we invested in New Jersey’s NJBEST College Saving Plan.

By the time we moved to New York, I knew that I could continue investing the New Jersey 529, but New York gave a state tax deduction if you invested in the New York plan, so while we enjoyed the hospitality of the Hudson Valley region, we bought into New York’s 529 College Savings Program Direct Plan.  

When we moved to Massachusetts, I couldn’t bear the thought of opening yet another account.  Massachusetts doesn’t give a tax deduction for 529 contributions (boo! hiss!) — surprising, considering that our state ranks #8 in the number of colleges per capita — so I plunked a couple of years worth of contributions into the New Jersey fund.

My partner and I keep separate accounts.  Because the Federal Government doesn’t recognize our marriage, I find it’s just simpler to track our finances separately.  Thus we currently have two NJ and two NY accounts.  That seems like a lot of overhead for just one small boy.

Could we simplify?

I would prefer to have fewer accounts and better investments.  It’s time I looked for a really good 529 program. Read the rest of this entry »

Tags: 529 funds, funding college, paying for college