Costs, Conflicts, and College Savings: Evaluating Section 529 Savings Plans

Americans collectively save hundreds of billions of dollars for their children’s education in Section 529 college savings plans. These plans are sponsored by states and largely exempt from the legal regimes that typically apply to money managers. This is the first academic study to comprehensively evaluate the quality of menus offered by these plans. While some plans are cost-efficient, there is considerable variation, and many plans are egregiously expensive. While large 401(k) plans have average total costs of 0.3%, college savings plans average 0.31% in administrative fees alone, with investment expenses adding another 0.32%. Plans distributed through brokers are particularly costly. Controlling for size, broker-sold investments are twice as expensive as those sold direct to consumers, even before accounting for brokerage sales charges that may exceed five percent of invested assets. A careful examination of plans’ legal disclosures shows that some states generate significant revenue from plan fees and use that revenue to support activities that do not directly benefit plan investors, including subsidizing defined-benefit-style plans. This cross-subsidization may undermine incentives for state administrators to negotiate lower costs and is in tension with state boards’ role as fiduciaries. These results raise questions about whose interests are served by 529 plans and whether investors are adequately protected by existing regulations.