A Costly Lesson in College Savings

Save for college and reap big tax breaks under a 529 plan. What's not to like?

Ask Keith McCrae, a 47-year-old father of two who took the 529 plunge three years ago. At the time, his home state of Ohio was rolling out its version of the mutual fund-style accounts designed to help families with college-bound children. His financial adviser was only too happy to sign him up.

But he didn't read the fine print -- until after he'd handed over his money.

Closer scrutiny revealed fees of 2.5% a year on the plan -- almost assuring mediocre, and possibly even negative, returns on his funds. Had he known about the high fees, McCrae never would have selected the 529 plan from Ohio, recently named one of the worst performing programs in the nation by the rating service Morningstar.

"I should have done my homework first," he said.

While McCrae takes some of the blame, a growing chorus of federal legislators, regulators and financial analysts are faulting the popular savings plans for a host of investment sins, namely exorbitant fees and commissions, lack of disclosure, poor performance and needless, overwhelming complexity.

If that isn't enough, with interest rates now on the rise, financial advisers also warn that the most popular type of 529, known as an age-based plan, could be a ticking time bomb. The plans for students nearing college are often heavily weighted in bonds, which could suffer big losses if rates continue to rise. Given the sophistication and perseverance needed to track the fund assets, advisers say, typical contributors could be blindsided by mediocre returns or loss of principal when they most need it.

No surprise then, that the plans are now the focus of two congressional hearings, a Securities and Exchange Commission task force and a securities industry regulatory investigation. Indeed, 529s are joining mutual funds and insurance annuities as the latest investment vehicle to be denounced for putting the interests of financial-service providers ahead of the consumers they were intended to help.

Source: THE STREET