Your 529 College Savings Plan Is Underperforming — Here’s Why

529 college savings plan theme with textbooks and piggy bank and green chalkboard background.
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When you put away money for your child’s college education in a 529 plan, you want to make sure it grows as much as possible before your teen graduates high school. With this in mind, it’s not good news to find out that 60% of 529 accounts are underperforming, according to a new study from the National Bureau of Economic Research.

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Millions of 529 Accounts Are Underperforming

The study — authored by a trio of researchers from the University of Pennsylvania’s Wharton School — found that 8.9 million 529 accounts were held in suboptimal home state accounts, which represented more than 6 out of 10 open accounts in 2020. While this percentage of suboptimal investments has dropped since 2012, people are evidently still confused about the best place to invest their 529 savings.

Your 529 plan could be losing money due to fees, or you might not be getting the best tax savings available to you. The study estimated that suboptimal investments can result in a loss of 9% over the projected lifetime of a 529 account, which could equal thousands of dollars depending on how much you have invested.

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Your 529 College Savings Plan Could Be More Expensive Than Necessary

According to Accounting Today, “Choosing the right plan involves piecing together a puzzle involving tax rates in your state and the plan state, along with fees and whether either or both states offer credits or deductions for contributions.” Be sure to do your research to learn what state plan would be most tax advantageous for your situation.

There are two different flavors of state-sponsored 529 plans. One avenue involves prepaying tuition and related expenses in advance of the beneficiary attending an eligible institution of higher education (typically a public or in-state college or university). The second route involves opening an investment account containing ETFs and mutual funds — assets which can be used to fund education more broadly. It should be noted, as Accounting Today pointed out, that 529 plan program managers are not bound by certain financial rules one might assume are in place:

“All 50 states, including the District of Columbia, contract with a record keeper, asset management company, bank or government agency to set a menu of investment options and administer the accounts. That ‘program manager’ is typically an investment manager — Vanguard, Capital Group’s American Funds and Fidelity Investments are the top three of 529s. Program managers aren’t subject to the fiduciary responsibilities to act in a client’s best interest, so some plans may contain high-cost funds.”

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Additionally, be cautious about getting costly financial advice for your 529 plan selection or purchasing a recommended plan from a financial advisor without doing your own independent research. The study reported that advisor-sold plans were typically the suboptimal plan among home-state options and usually held higher fees than 529 plans bought directly from plan sponsors.

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About the Author

Becky Neubauer is a personal finance and science freelance writer who specializes in writing about managing money, sustainability, entrepreneurship, and alternative living. She has a bachelor’s degree in environmental science, and she learned about personal finance on her journey to pay off $100,000 in student loans. Becky is an avid traveler focused on helping others live location-independent lifestyles, make money on the road, and travel the world through her website
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