COSTS, CROSS-SUBSIDIES, AND COLLEGE SAVINGS: EVALUATING SECTION 529 SAVINGS PLANS

ABSTRACT:  Americans collectively save hundreds of billions of dollars for their children’s education in Section 529 college savings plans. These plans are sponsored by states and largely exempt from regulations that typically apply to money management. This is the first academic study to comprehensively evaluate the quality of menus offered by these plans. While some plans are cost-efficient, there is considerable variation, and many plans are egregiously expensive. While large 401(k) plans have average fees of 0.3%, college savings plans average 0.4% in administrative fees alone, with investment expenses adding another 0.3%. Plans distributed through brokers are particularly costly. Controlling for size, broker-sold plans are 0.83% more expensive than plans sold direct to consumers, even before accounting for brokerage sales charges that may exceed 4% of invested assets. Drawing on a careful examination of plan documents, I show that states generate revenue from plan fees and use that revenue to support activities that don’t directly benefit plan investors, including subsidizing defined-benefit style plans. This cross-subsidization may undermine incentives for state administrators to negotiate lower-costs. These results raise questions about whose interests are served by 529 plans and whether investors are adequately protected.