“I learned law so well, the day I graduated I sued the college, won the case, and got my tuition back.”
If you’ve decided that a 529 savings plan is the best way to fund your little bundle of joy’s exposure to the wisdom exuded from the ivory towers, you probably immediately came upon a befuddling set of choices. Any quick search will reveal that there are tons of 529 plans to choose from, and you’re eligible for almost all of them.
Your immediate Monkey Brain reaction (he has to make a stand somewhere, since you’re taking money away from him now to pay for the future generation’s learning) is to take the default option – buy the 529 plan in your home state. Gotta support the home team, right?
If you live in a state with a crappy inefficient 529 plan, you may be depriving Junior(ette) of thousands of dollars of tuition money in the long run. Remember, fees eat into your investments, and the 529 plan is basically a 401k plan for education.
How Do You Sort the Wheat From the Chaff in 529 Plans?
I’m going to give you a list of four don’ts and three dos to follow when you’re looking for a 529 plan.
(and, yes, the apostrophe is correct; apostrophes don’t signify plurals)
Don’t pay a commission to a planner. Many states offer the same plans in two flavors: ones that you buy yourself, and ones that you have a planner buy for you. They offer the exact same investments except the one minor detail: you’ll pay between 2% and 6% for the “privilege” of having someone else spend 10 minutes to make the purchases for you.
Don’t buy pre-paid tuition. Prepaid tuition locks you into sending your child to one college or group of colleges, limiting your real options. To me, that’s just taking too much risk and assuming too many things will go right that can go wrong between now and the first day of freshman year.
Don’t invest in plans which only offer actively managed funds. Over time, actively managed funds underperform the market, so you’re trading the perception of something actually happening (“they’re trading like the mad geniuses they are!”) for real performance.
Don’t invest solely in CDs or money market accounts. Inflation of tuition is MUCH, MUCH (MUCH!) higher than whatever paltry return you’re going to get on CDs or money market accounts. Money market accounts and CDs are great for emergency funds, but not for making sure the kid can go to college.
Great. Now you know what not to look for in a 529 plan. What should you look for?
Do look for plans in which you can enroll. Live in Texas? You’re not eligible for Louisiana, New Jersey, Rhode Island, South Carolina, South Dakota, or West Virginia. Sad trombone.
Do look for plans which offer index fund investments. Chances are good, as I mentioned before, that if you try to beat the market, you’re going to wind up underperforming the market, and often by a wide margin. Don’t step in that bear trap. Index funds will keep you from trying to play Jim Cramer when you’re not Jim Cramer.
Do look for plans with low fees. Fund managers almost always get paid as a percentage of the money that you put into the 529 plan. Some states also take a cut of it for their administration. That’s money which has gone up in smoke as far as you are concerned. Comparison shop to get the lowest fees.