My 529 college saving plans

I am currently contributing to two 529 college saving plans. Even though for simplicity reasons, it is usually better to consolidate investments into one account, I find that having two accounts actually works better for me. Why did I end up with two plans? Read on…

The first step in selecting a college saving plan is to check if your home state provides any financial incentive (e.g. state income tax deduction) to invest in the state-sponsored college plan. For me, the state of California provides no such incentive. The California plan, managed by TIAA-CREF, is fairly respectable. It’s costs (ER 0.8%) is reasonable, but not the lowest; so I looked elsewhere.

My main criteria for selecting a college includes the following:

  • Cost of the plan (expense ratios and account fees),
  • Range of investment options, and
  • Other special incentives.

The two accounts I ended up with are the following.

Account 1: Fidelity’s Unique College Investing Plan (sponsored by the state of New Hampshire).

I selected this plan based on the special incentives available with this plan. With this plan, I was able to apply for the Fidelity-MBNA co-brand 529 College Rewards credit card. This card gives you 2% back on practically anything you charge to the card. In addition, it also offers you online Bill Payment service which lets you pay many merchants including even your mortgage or electric bill (but no rewards for these). The rewards are accumulated and posted to the 529 plan once every calendar quarter.

The overall expense ratios of this plan are on average about 1%. These are reasonable numbers but not particularly attractive. The following table shows the expense ratios of the funds and the account fees:

2006-09-19-fido-529-plan-480�388.png

Note from point (6) that there is an account maintenance fee of $20 a year but this can be easily avoided by setting up a systematic contribution of at least $50 a month. This is the amount I am contributing to this plan.

To summarize, the main benefit for me to contribute to this plan is to get the credit card rewards. By my calculations, I would get about $500 to $600 in rewards a year from this card, almost the same as the amount I would contribute from systematic contributions (12 x $50 = $600).

Account 2: Ohio state’s College Advantage Plan

The second account is where I do my serious college savings. This plan was selected based on its very low costs and a respectable range of investment options.

I was interested to have the following asset allocation for the investment plan: 30% US Large-Cap equity, 30% US Small-/Med-Cap equity, 30% International equity and 10% fixed income. With that in mind, I started looking at the various plans available. Some of the plans I considered are tabulated below.

2006-09-19-529-compare-480�400.png

The Utah plan has always been touted as the cheapest 529 plan but what I found was that based on my options, it is not the cheapest (especially if you are not a resident in Utah). Besides, I dislike its confusing account fees, and I think this could actually be the reason why some think it is the cheapest: simply because the various UESP add-on fees were not accounted for.

The Vanguard 529 (Nevada) plan is interesting for those who like to see their 529 account with one Vanguard login. The funds in this plan can also be counted towards the qualification for Voyager / Flagship status. This is quite an attractive benefit.

Those interested in DFA’s funds can also look into West Virginia’s SMART529 plan. The fees range from 0.75% to 1.05%.

In the end, I found that the plan that makes the most sense for me is Ohio’s College Advantage Plan. The total expense ratio for this plan is only a mere 0.352%. Besides, I see no reason paying almost double the expense ratio for the Vanguard 529 plan just to get the ability to qualify for Voyager / Flagship.

21 Comments

  1. Steve D

    Thanks for the analysis of the Ohio plan vs. Utah & Nevada. I am opening the plan, along with a NH plan for the rewards program, right now.

    For the fixed income part of your Ohio investments, did you consider the CD’s? They are offering 5% for up to 10 years. Since this is tax-free under the 529 rules, would you think this freedom from loss-of-principle and guaranteed return are valuable?

    Also, instead of the Total Bond Index, did you consider the Inflation-protected (TIPS) fund? I am concerned about unexpected inflation, either of the economy or of college costs, seriously cutting into the returns.

    Thanks for sharing your analysis efforts.

    Steve

    Reply
  2. indexfundfan (Post author)

    Hi Steve,

    I did not consider the CDs because I am doing DCA and it takes $500 to open a CD. I do not have $500 to put into the fixed income part every month. If you have a lump-sum, a CD will be feasible.

    That aside, I prefer using a bond fund because I believe in the long term, and with DCA, I would likely end up ahead of the CD.

    I did consider using TIPS briefly but I think it is much more volatile compared to the total bond option.

    You are right to be concerned about rising college costs but I think the price of TIPS reflects very little on college costs inflation. Personally, I prefer to be more aggressive on the equity side and just use the total bond option.

    Reply
  3. Pingback: Indexfundfan @ Indextown » Changes to Fidelity’s 529 College Plans

  4. John

    I love your breakdown of the Ohio College Advantage Plan. We live in PA and the governor recently signed a bill that allows for a state tax deduction for contributions to ANY state’s 529 plan. Even though PA just changed to using Vanguard, the ER are still quite high so we’re opening an account with Ohio soon.

    Reply
  5. indexfundfan (Post author)

    John,

    Thanks for your kind words.

    BTW, the Fidelity’s 529 plan mentioned in this post has been updated:

    http://www.indextown.com/archives/2006/11/22/changes-to-fidelitys-529-college-plans/

    The Fidelity plan now has no annual fees and this eliminates the requirement to have a monthly contribution to this plan. I plan to move the monthly contribution to the Ohio plan to minimize on the expense ratios.

    Reply
  6. Carl

    Great article. Have you tried college saving using credit card? I have found list of credit cards which will allow you to save directly in 529 plans plus CDs which will index to 529 plans and inflation at http://www.plans529.com/Directory/tabid/145/Default.aspx

    Reply
  7. indexfundfan (Post author)

    Hi Carl, the Fidelity credit card that I am using contributes 2% of everything I charge to the card into my 529 account.

    Reply
  8. Pedro

    After this years Morningstar 529 assesment do you still think that the Ohio plan is best?

    Reply
  9. indexfundfan (Post author)

    Hi Pedro, I don’t think the cuts at Vanguard’s Nevada plan or the Utah plan puts their costs below the Ohio plan.

    Reply
  10. bon

    Looked at the Utah plan, the options you are showing are not offered now. Care to update? I could not come up with your calculation for the fee to be 0.467% for a hypothetical 200K investment. I am not sure where you are getting the .81% fee and maybe that is why your results are skewed. Please post an update if you can. Trying to decide between Utah and Select529 (which you have not covered) for a 20K investment.

    Reply
  11. indexfundfan (Post author)

    Bon,

    According to the page at

    http://www.uesp.org/investmentOptions02.html

    the Vanguard International Value fund has an ER of 0.46%. Add the 0.25% admin asset fee, you get 0.71%. This is 0.1% lower than 0.81%; the difference is probably because Vanguard has lowered its fund expense after I made the post.

    The overall expense ratio takes into account “other fees”.

    By the way, Ohio 529 has also lowered its expense since this post. So it make sense to compare with all the new fees.

    Reply
  12. bon

    Thanks for your response. However, I am still not sure how you are arriving at those numbers. First, Utah does not offer individual options like you have selected, but Ohio does. e.g. there is no way to invest 30% in small cap in a Utah Plan. What Utah offers is pre-defined portfolios and for the expense ratio of the portfolio, they just give the weighted average of all the funds inside that portfolio. Here is the link : http://www.uesp.org/pdfs/FeeStructureTableJul2007.pdf

    Secondly, the funds offered by Utah are quite different like Vanguard International Growth ADM Shares,Vanguard International Value. These are not index funds and are not bound to invest in developed world only i.e. they can invest in India and China, etc. The fund offered at Ohio is actually a fund of funds with 60-40 Europe and Asia/Pacific split. No emerging markets though. So we really cannot compare these funds as they are different and their returns are different too. But for sake of simplicity, I am going to consider them the same and continue. Same goes for the Enhance Index plus institutional fund which is not a true S&P 500 index fund and is supposedly spiced to give extra returns.

    In the fee structure for Utah, the maximum expense I see is .38 for Diversified B. I will take this as an example to compare becasue that is the one I was considering. Let me try to construct a similar portfolio in the Ohio Plan, 20-Bond, 40-S&P, 16-Small/mid and 24-International. So the weigthed average for such portfolio would be 0.3124 for Ohio. So the real difference is .0676 for this particular portfolio plus the $20 annual fee. But for balances above 100K that $20 fee is 0.0200% making the total difference 0.0876, which translated to $$ translates to about $87/yr in extra fee (and is a little lower than what you have shown but that is because of the allocations). Now, for this extra $87 you are investing in much better funds which have very good 1,3,5 and 10 yr records. So in a way, the Ohio plan is truly index based, however the Utah plan has some managed funds as well.

    So, can the $87 difference be offset by the funds with better returns? I don’t think I have an answer for that question. Oh, one more thing. Is the asset allocation in this portfolio good? I don’t know. I like yours better 30-30-30-10. But it was supposedly designed by Vanguard keeping a lot things in mind. So I guess I should be OK with that. Althogh personally I think 16% is way too less for small/midcap exposure for a something that has a very long time horizon.

    Let me know what do you think of my analysis or if there is a better way to slice/dice it. Also, what are your comments about the Smart Select 529 Plan? Should that be considered too?

    Reply
  13. indexfundfan (Post author)

    Bon,

    I do not have the Utah plan and so I was missing the details. I just checked the details and yes, you are right, the Utah’s static options do not allow you to individually select the funds you want. Personally, this makes the Utah plan even less appealing to me

    For the international option, I more or less just picked what is available for international equities and did not consider the differences.

    From your calculations, the Ohio plan is still cheaper than the Utah plan, and has more flexibility in terms of asset class customization. I am not sure if I agree that the Utah funds are better — I prefer an indexed portfolio myself. Therefore, I would still pick Ohio over Utah.

    But I have heard that the “cheapest” honor now belongs to IL 529. I haven’t checked if this is true or not.

    Reply
  14. bon

    Looked at the IL plan just now. Yes for Vanguard index funds it is the cheapest I can see. For an all equity portfolio, the total fee is .20% plus $10 annual fee. However the asset allocation sucks. There is no choose your own allocation option and the one they have is 75% S&P, 10% Enhanced (small/mid) and 15% international. 🙁

    On one side no one can predict how the market returns would be in future, but having 75% assets in S&P is not something to cheer about. I wish I could do more in International and small/mid.

    Here is the link : http://www.brightstartsavings.com

    What do you suggest?

    Thanks

    Reply
  15. indexfundfan (Post author)

    Bon,

    It appears to me that having the ability to customize asset allocation is very important to you. If that is the case, then the Ohio plan might turn out to be the most appropriate — cheap (but not the cheapest) and yet allows asset allocation customization.

    Alternatively, you can also have two or more plans if you wish — and you can for example take advantage of the cheapest options from one plan (say IL plan) and mix it with options form another plan (say Ohio plan) to round out the portfolio to one that you desire.

    Personally, I feel that any reasonably diversified portfolio should work as well as the next one. I like my 30-30-30-10 for its simplicity and control and I have no idea if it will perform the best or not.

    Ask me again in 20 years’ time and I will tell you 😉

    Reply
  16. Bimmer

    Indexfan,

    Thanks for the site. Quick question: Are there fees in the Ohio plan for rolling the account over to another plan or for changing the beneficiary? I’ve scoured their literature and can’t find them, but all other plans have them. Thanks.

    -Bimmer

    Reply
  17. indexfundfan (Post author)

    Bimmer,

    Unfortunately, I haven’t tried any rollover, so I do not know off-hand the fees (if any).

    Reply
  18. John

    Was looking into a Virginia 529 (VEST) as it was a “Top 5 pick” in an e-mail newsletter I received recently:

    http://www.marketwatch.com/News/Story/Story.aspx?guid=%7B4A1DD2B1%2D961A%2D4428%2D8054%2D75DBB54CCF80%7D&siteid=nwhpf&lsn=17

    A similar portfolio 60% VG Total Stk Mkt, 30% VG Total Intl Stk Mkt, 10% VG Total Bond Mkt in the VEST plan may be SLIGHTLY preferred than your (as well as our) Ohio portfolio. We use 40% VG 500, 20% VG Ext Mkt, 30% VG Dev Mkt Intl, & 10% VG Total Bond Mkt. However, the current expense ratios still favor Ohio by a good bit: Ohio 0.286% and Virginia 0.389%. So I’m still going to stick with current Ohio plan as I haven’t found anything near as well-rounded, easy allocation, and low cost.

    Reply
  19. Pingback: indexfundfan @ indextown » Blog Archive » Ohio State 529 plan lowers fees again

  20. StoneyPA

    If you had the option in your 529 of using 10% VG total bond market OR 10% TIPS over the long-term (15-20yrs), which would be your vehicle of choice?

    Reply
  21. indexfundfan (Post author)

    StoneyPA,

    I actually like a combination of 50/50 TIPS and TBM. But in this case since the bond allocation is only 10%, I would probably just continue to use TBM.

    Reply

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