Broker

Broker Sold 529 plans:

In addition to fees mentioned in the prior post, you pay even more fees with broker-sold 529 plans.

Personally, I will not go through a broker, but I’ve included information for completion’s sake.

Additional fees that reduces your investment return in 529 include:

  • a “load” is a commission to your broker for selling the college savings plan to you.
  • an annual distribution fee (similar to the “12b 1 fee” charged by some mutual funds) of between 0.25% and 1.00% of your investment.
  • Many broker-sold 529 plans offer more than one class of share with different fees and expenses. Here are some key characteristics of the most common 529 plan share classes sold by brokers to their customers:
* Class A shares typically impose a front-end sales load. Front-end sales loads reduce the amount of your investment. For example, let’s say you have $1,000 and want to invest in a college savings plan with a 5% front-end load. The $50 sales load you must pay is deducted from your $1,000, and the remaining $950 is invested in the college savings plan. Class A shares usually have a lower annual distribution fee and lower overall annual expenses than other 529 share classes. In addition, your front-end load may be reduced if you invest above certain threshold amounts – this is known as a breakpoint discount. These discounts do not apply to investments in Class B or Class C shares.
* Class B shares typically do not have a front-end sales load. Instead, they may charge a fee when you withdraw money from an investment option, known as a deferred sales charge or “back-end load.” A common back-end load is the “contingent deferred sales charge” or “contingent deferred sales load” (also known as a “CDSC” or “CDSL”). The amount of this load will depend on how long you hold your investment and typically decreases to zero if you hold your investment long enough. Class B shares typically impose a higher annual distribution fee and higher overall annual expenses than Class A shares. Class B shares usually convert automatically to Class A shares if you hold your shares long enough. Be careful when investing in Class B shares.  If the beneficiary uses the money within a few years after purchasing Class B shares, you will almost always pay a contingent deferred sales charge or load in addition to higher annual fees and expenses.
* Class C shares might have an annual distribution fee, other annual expenses, and either a front- or back-end sales load. But the front- or back-end load for Class C shares tends to be lower than for Class A or Class B shares, respectively. Class C shares typically impose a higher annual distribution fee and higher overall annual expenses than Class A shares, but, unlike Class B shares, generally do not convert to another class over time. If you are a long-term investor, Class C shares may be more expensive than investing in Class A or Class B shares.

Ways to minimize 529 plan fees:

Direct-Sold 529 is the obvious choice to minimize costs and maximize returns.

  • You buy directly from the plan’s sponsor or program manager without going through a broker. This way you avoid all the middle-man fees such as sales fees from broker-sold plans.
  • Check out College Savings Plan Network list of 529’s with links to most 529 plan websites.

If you insist on getting Broker-Sold 529, you may reduce the front-end load for purchasing Class A shares by investing above certain threshold amounts. Ask your broker how to qualify for these “breakpoint discounts.”


Restrictions of a 529 plan:

  • You can only withdraw your investment in a 529 plan for eligible college expenses without incurring taxes and penalties.
  • Limited investment options.
  • Under current tax law, an account holder is only permitted to change his or her investment option once annually.
  • Additional limitations will likely apply to any 529 plan you may be considering.

Before you invest in a 529 plan, you should read the plan’s offering circular to make sure that you understand and are comfortable with any plan limitations.


529 impacts on financial aid eligibility:

529 generally reduce a student’s eligibility to for need-based financial aid. Beginning July 1, 2006, assets held in pre-paid tuition plans and college savings plans are treated as parental assets in the calculation of the expected family contribution toward college costs.


Questions to ask before investing in a 529 plan:

* Is the plan direct sold? (i.e. available directly from the state or plan sponsor)
* What fees are charged by the plan? How much of my investment goes to compensating my broker? How can I get the fees waived or reduced?
* What are the plan’s withdrawal restrictions? What types of college expenses are covered by the plan? Which colleges and universities participate in the plan?
* What types of investment options are offered by the plan? How long are contributions held before being invested?
* Does the plan offer special benefits for state residents? Would I be better off investing in my state’s plan or another plan? Does my state’s plan offer tax advantages or other benefits for investment in the plan it sponsors? If my state’s plan charges higher fees than another state’s plan, do the tax advantages or other benefits offered by my state outweigh the benefit of investing in another state’s less expensive plan?
* What limitations apply to the plan? When can an account holder change investment options, switch beneficiaries, or transfer ownership of the account to another account holder?
* Who is the program manager? When does the program manager’s current management contract expire? How has the plan performed in the past?

More information:

Offering Circulars for 529 Plans. Often called a “disclosure statement,” “disclosure document,” or “program description,” the offering circular will have detailed information about investment options, tax benefits and consequences, fees and expenses, financial aid, limitations, risks, and other specific information relating to the 529 plan. Most 529 plans post their offering circulars on publicly available websites. The National Association of State Treasurers created the College Savings Plan Network which provides links to most 529 plan websites.

Additional Information About Underlying Mutual Funds. You may want to find more about a mutual fund included in a college savings plan investment option. Additional information about a mutual fund is available in its prospectus, statement of additional information, and semiannual and annual report. Offering circulars for college savings plans often indicate how you can obtain these documents from the plan manager for no charge. You can also review these documents on the SEC’s EDGAR database.

Investment Adviser Public Disclosure Website. Many college savings plans’ program managers are registered investment advisers. You can find more about investment advisers through the Investment Adviser Public Disclosure website. On the website, you can search for an investment adviser and view the Form ADV of the adviser. Form ADV contains information about an investment adviser and its business operations as well as disclosure about certain disciplinary events involving the adviser and its key personnel.

Broker-Dealer Public Disclosure Website. You can find more about a broker through FINRA’s BrokerCheck website. On the website, you can search for any disciplinary sanctions against your broker, as well as information about his or her professional background and registration and licensing status.

Other Online Resources. You can learn more about 529 plans and other college saving options on FINRA’s Smart Saving for College website. The website contains links to other helpful sites, including the College Savings Plan Network and the Internal Revenue Service’s Publication 970 (Tax Benefits for Higher Education). FINRA’s investor alert on 529 plans also provides valuable information for investors.


To Learn More:

  1. 529 Plans: Questions and Answers (IRS)
  2. An Introduction to 529 Plans (U.S. SECURITIES AND EXCHANGE COMMISSION)
  3. 529 fee study
  4. IRS Publication 970: Tax Benefits for Education
  5. Utah Educational Savings Plan
  6. 529-plan-contribution-deadlines-for-state-tax-benefits
  7. The Experts: Are 529 Plans the Right Choice for All Families Saving to Send Their Kids to College?
Mini’s College Fund, 529: Intro Part II

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