- Most states incentivize their residents to participate in 529 plans by offering a tax deduction for contributions.
- States only offer a limited menu of 529 plans (usually 1-3 different plan options).
The combination of these two factors has resulted in parents/grandparents simply settling with one of their state’s 529 plan offerings. With the steady flow of participants to state-designated 529 plans, fund managers have had little incentive to reduce their costs.
What many folks don’t realize is that a number of states (16 to be exact, NJ is one of them!) offer no substantive benefits (i.e. tax deductions) for using their state-designated 529 plans. To add insult to injury, Morningstar has just downgraded NJ’s Franklin Templeton 529 College Savings plan (1 of the 2 plans offered by NJ) from neutral to negative. REASON: The NJ Franklin Templeton plan’s most popular option, their “Growth” age-based plan, has an average fee of 1.19% while the national average expense ratio of 529 plans is .55%. Morningstar wrote about the NJ Franklin Templeton plan, saying that “subpar oversight at the state and program manager level decrease our confidence in the plan’s long-term prospects.” NOT the most promising review…
If you invested $24,000 when your child/grandchild was three years old and left the funds untouched for 15 years, an average annual return of 7% would result in the NJ Franklin Templeton plan growing to $55,990 while the “average” 529 plan would have reached $61,291. An even lower-fee 529 plan (like one offered through Vanguard*) would have grown to $63,665 over that same period.
– NJ Residents: Given NJ’s lack of 529 tax incentives and less-than-compelling 529 plans, we advise clients to explore their options. Great options to consider include:
- Utah (UESP 529 – https://www.uesp.org/)
- West Virginia (Smart 529 – http://www.smart529select.com)
- Vanguard 529 (No direct state affiliation – https://investor.vanguard.com/529-plan/)
– NY Residents and beyond: Single NY tax filers can reduce their taxable income by $5,000 by making a $5,000 contribution to a NY 529. This amount increases to $10k for those who are married and file jointly.
- BEWARE: While it’s great that NY (like many states) offers a tax deduction, be aware that participants have to choose between “Advisor-Guided Plans” and “Direct Plans” – always opt for the direct plans. Advisor-Guided Plans typically charge just over 5% for every 529 contribution. That is, each time you contribute money to the child’s 529 account, 5% of your contribution (no matter the size) goes directly to a financial salesperson’s pocket.
Don’t let fees drag down the precious funds you are setting aside for the next generation’s continuing education. As always, please feel free to contact our team to discuss this further
*Vanguard’s average 529 expense ratio is .28%