Choosing 529 Plans: Where Do I Start?

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Mar 16, 2004

The hardest part about saving for college is just to start doing it. Where to begin? Well, if you have not heard the news yet, 529 College Savings Plans, tax-free funds that have been made possible by laws passed in 2002, provide the best opportunity to meet the growing cost of college. Marketing of 529 plans has picked up, as you may have noticed, but this usually leads people down the wrong path. The way fund managers typically market their plans is as if they were the only plans available. This is a very tricky tactic yet it works because these plans are so new and most people are not aware that there are over 80 plans and more than 1,000 investment options to choose from. Let's give credit where it is due to the fund managers. They have spent millions of dollars in advertising, which raises awareness and touches on the dreams that parents have for their children, not to mention adding a little twist of guilt for those who have not paid attention to education planning.

One Plan versus Multiple Plans So now that we've established that 529 plans are generally the best way to go, where do parents start in the process of choosing 529 plans? First of all, let's get one thing straight up front. You do not need to invest all of your money in any one plan with one fund manager. In fact, it makes all the sense in the world not to put all your eggs in one basket, when there is no penalty for diversifying, except the extra time that it takes to enroll in and then track multiple accounts. This is a very important point to remember, especially since most plans market theirs funds as if they are the only show on earth.

Sources of Advice on 529 Plans Where do you go for help on narrowing down the playing field, from the 80+ plans and 1,000+ investment options? Below we take a look at your realistic options.

How about going to the bank? Try again. Most banks either promote a limited number of plans or none at all. It just doesn't fit into their financial model unless they own a brokerage division that can promote its own 529 plan, in which case your choices are usually limited to that offering.

What about a financial advisor? Sure, if you don't mind paying hefty commissions or you have great trust in your advisor. But don't forget that almost all advisors are paid on commissions, for gathering more of your assets. Plus, most advisors are restricted or affiliated with certain plans, which means you will not be given objective advice on the whole universe of 529 plans. If your advisor works for a firm that offers their own 529 plan, you must really do your homework independent of the advisor prior to making any decisions. Make sure you understand the relationship that an advisor has with the particular funds that he or she recommends beforehand as well.

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