We have written multiple articles about the 529 Plan and the benefits of utilizing this investment vehicle for your child. But these relatively young plans, launched in 1996, may have some bigger drawbacks than earlier projected.
Expense Ratio Considerations
As with any big investment, it is crucial to shop around first. Comparing different 529 Plans will not only help you figure out what you need out of your investment, but you can also familiarize yourself with the different fees associated with these plans.Learn: College Savings 101
One such fee is called the Expense Ratio. The expense ratio is the percentage of your investment that goes towards operating expenses and management of the account. Although this sounds extremely similar to a maintenance fee, they are categorically different. Each plan can carry an expense ratio that ranges from the lower amount of .25 percent to 2.00 percent. In this Mint.com article writer Matthew Amster-Burton does a simple calculation to show the differences a few percentage points can make. He takes a plan with a 6% yield on a monthly investment of $200 for 18 years and comes up with:
Expense Ratio Total Savings
The nearly $10,000 difference between the .25 percent expense ratio and the 1.85 percent expense ratio demonstrates the large difference this pesky little fee can cause. According to Amster-Burton “Small differences in expenses have a huge effect on your balance…you’re missing out on the opportunity to earn compound interest on it in the future.”
These plans can be dense and difficult to understand, especially with the various fees attached. Although regulators are working on cutting down these fees to make college more affordable, costs are still on the rise. The best thing to do when looking at different investment opportunities is the math. Look at the incentives offered by each state, see what the price would be for instate and out-of-state institutions. Many parents may be sold by one benefit to a plan or another, but in order to make the most out of your money, you have to look at the end result of the entire package.