Not Doing Homework Costs Parents Too

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Parents who forget to do their homework before choosing a state-sponsored college savings plan are being sold funds with the highest fees, according to a survey of state-sponsored 529 college savings plans just published in the Journal of American Taxation Association. The Securities and Exchange Commission (SEC) is investigating the sales practices of 529 plans and has reportedly requested a copy of the article.

“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,” University of Kansas (KU) professor and co-author of the survey, Raquel Alexander said in a prepared statement announcing the results.

Taxpayers have currently invested more than $65 billion in 529 college Savings Plans, which allow investors to make after-tax contributions to the plans and withdraw funds, tax-free, to use for qualified college expenses. That amount is expected to climb to $300 billion by 2010, according to Investment News.

Each state has at least one plan, however, investors can choose a plan from any state, regardless of where they live. Because of this, investors are faced with hundreds of choices, all with varying fees and benefits, making it difficult to choose the best plan for their needs. The research indicates that one area where taxpayers may not be making good decisions is in tax planning, as the states providing the largest income tax deductions 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?”

When Alexander and co-author LeAnna Luna of the University of Tennessee conducted their initial research, the investment returns for 529 plans were not reported, so investors had no way to determine which plans pulled in the highest gains. Those results are now available, thanks in part to the pair's research. In addition, many states slashed fees following presentation of preliminary results from the survey in 2004 and 2005. A follow-up article is planned in which they will analyze the plans' returns during the same period as the initial research.

“Then we can really say whether or not investors suffered because they invested in plans with higher fees,” Alexander concludes.

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