Parents Sold Higher-Fee State College Savings Plans

Newswise — Parents who don't do their homework when deciding which state-sponsored college savings plan to pick are being sold funds with the highest fees, research by a University of Kansas accounting professor shows.

A survey of state-sponsored 529 college savings plans — available to residents of any state — found that the plans with the higher fees had attracted more accounts and assets that those with lower fees, according to research by KU professor Raquel Alexander and co-author LeAnna Luna of the University of Tennessee just published in the Journal of American Taxation Association.

"Our results are consistent with the fact that it's so difficult to choose the right plan that people ask investment brokers for advice, and brokers are selling investors the high-fee funds," Alexander said.

Alexander and Luna also found that the states providing the largest income tax deduction for contributions had the smallest number of accounts.

"I found this surprising," Alexander said. "Why would you choose something with the highest fee that doesn't offer a deduction?"

Following presentations of their preliminary results in 2004 and 2005, many states slashed fees. The Securities and Exchange Commission, which is investigating sales practices of 529 plans, has requested the article for its inquiry.

The idea behind 529 College Savings Plans is simple: Investors make after-tax contributions to plans and can withdraw funds tax-free, as long as the money is used for qualified college expenses. But instead of simplicity, investors are faced with hundreds of choices, all with varying fees and benefits, making it virtually impossible to choose the best plan for their needs. Every state has at least one plan, but investors can choose plans from any state regardless of where they live.

Taxpayers have invested more than $65 billion in 529 College Savings Plans. That amount is expected to increase to $300 billion by 2010, according to Investment News.

When Alexander and Luna conducted their initial research, the investment returns for 529 plans were not reported, so investors had no way of knowing which plans pulled in the highest gains. Those results are now available thanks in part to Alexander's article, which focused a spotlight on the inequity.

With this new information, Alexander said she and Luna would soon write a follow-up article that analyzes the plans' returns during same period as the initial research. "Then we can really say whether or not investors suffered because they invested in plans with higher fees," she said.

Despite her research results, Alexander said 529 plans are wonderful college savings vehicles that provide unique income and estate tax benefits.

The title of the journal article is "State Sponsored 529 College Savings Plans: The Influence of Tax and Non-Tax Factors on Investors' Choice."

For more information about this release or the KU School of Business, visit http://www.business.ku.edu