The Downside of 529 Plans

A state-sponsored 529 college savings plan has a lot going for it. But the cost may be higher than you think. Some plans are teeming with fees.

"There's some really rotten plans out there," says Mari Adam, a certified financial planner in Boca Raton, Fla. "There's a few rotten apples."

Invest in a high-priced plan and you'll lose a nice chunk of earnings to hefty management expenses and other fees.

"Fees vary dramatically between 529 plans," says John Gannon, director of the NASD office of investor education. "People need to consider that, especially if you're making small investments. Any sort of annual fee structure can really hit you hard."

Earnings-eating fees

Let's say your family contributes $600 a year to a college savings plan with a $50 annual maintenance fee. And let's suppose an 8 percent return, which would be pretty good these days.

By year's end the account balance would swell to $648. But that $50 maintenance fee would knock it back down to $598. So after a year of investing, you've got $2 less than when you started.

Invest $300 a year in a college savings plan and that $50 fee packs an even bigger wallop. An 8 percent return would boost the account balance to $326 after a year. Toss in the $50 maintenance fee and your account balance bounces all the way down to $276.

After a year of investing, you've got $24 less stashed away for college than when you started. That's no way to build up a college fund.

And let's face it. A key advantage of a 529 plan -- tax-free earnings - - matters little if fees eat up all or most of your earnings.

"The advantage of the account, earnings growing tax-free, is moot because you've got no earnings," says Gary Pressley, president of Academic Funding Group in St. Paul, Minn.

The good news is many college savings plans will waive annual maintenance fees to in-state residents, people who make automatic contributions and people with large account balances, often $25,000 or more.

The bad news? There are plenty of other fees to worry about.

Several college savings plans charge you right from the get-go with one-time enrollment fees. These fees range from $10 to $90. Most fees are under $50.

Source: Bankrate.com