What Fees and Expenses will I pay if I invest in a 529 Plan?
As with any investment vehicle you always need to keep an eye on the overall fees and expenses that are being charged. It is not necessarily in your best interest to pay the lowest fee, but you certainly want to know that whatever fee you are paying is helping and not hurting your overall investment return. For example, would you rather pay a 1% fee and you earn 5% or 2% and earn 10%? At the same time, fees can hurt your overall return, saving 1% per year by not paying it in fees can really add up over the course of the 18 years until the beneficiary is finally ready to attend college.
The typical state run prepaid tuition 529 plan charges fees for administration as well as enrollment. There is normally an annual fee for administration but it is charged against the overall guaranteed return. Because the prepaid tuition plan is more of an installment plan to ensure that future tuition is paid, the overall fees are not as relevant as they are for the 529 savings plan option. Though it is always good to keep an eye on overall fees for any program, even if it is a state run guaranteed program.
The fees you pay for the 529 savings program are dependent upon your choices and how you implement your 529 saving plan strategy. All of these fees are very similar to those you would expect from any managed investment that requires state and federal reporting, such as for the different types of retirement accounts. With each account there will be fees associated with reporting to the government and tracking compliance. These fees usually only add up to $15-$50 per year.
The other fees you will pay are determined by the type of investment you choose for the overall savings plan. If you choose a money market there will likely be no associated broker fee. While if you choose a mutual fund or stock investment, there will likely be a fee associated with the actual management of the investment vehicle. These are normally called “loads” and fund management fees.
Front End Load & Back End Load
The “load” is either paid up front, during , or on withdrawal from the investment vehicle. For example, if you invest in a mutual fund that has a front end load you pay a fee every time you contribute to that mutual fund. If you choose a fund that has a “back end load” you pay a fee on withdrawal from the fund. The management fees are extra fees that are charged by the management of the mutual fund for managing the overall investment. It is usually a small percentage of the investment, normally under 1%.
All of these fees may sound like they are exorbitant, but in actuality they are not. Paying fees is the means by which you are hiring these professional money managers to handle and invest for you. They are full time professionals that do nothing other than work for you and your investment in order to make it grow as much as possible, given the investment constraints you give them. The overall fees for the 529 savings plan are not any more than the fees that everyone pays for their IRA plans or other retirement investments.