When it comes to 529 plans, tax-advantaged college investment accounts, parents often have questions about prices. But customer service is also something to consider when selecting one of these savings plans.
Eddie Pradel, community manager for online college savings gift registry GradSave, says the questions he gets the most are: "What if my child does not go to college--what happens to the money?" (a question asked by his own mom) "Can I open a 529 for my granddaughter or does it have to be done by a parent?" "Do I have to pick a 529 in my state?" "Can I use the money for housing or rent?" "Can I open one 529 for multiple children?"
[See what education supplies a 529 plan can pay for.]
Among the options college savers have are adviser-sold 529 plans, which are purchased from a financial adviser, and direct-sold plans, which are bought directly from the plan's sponsor or program manager without the assistance of a broker. Experts recommend parents ask the following questions to assess the value provided by their financial adviser or direct 529 plan customer service representatives. The key is to ensure the answers are fully explained.
1. Will fees vary based on my investments? All 529 plans have fees, but the fee structures vary. Any customer service representative should be able to explain these fees thoroughly. Parents should ask about maintenance fees, program management fees, and mutual fund fees for the specific plan and investments they're considering, says Chadderdon O'Brien, a New Jersey-based certified financial risk manager and certified financial planner.
For instance, the direct New York state plan has a flat fee of 0.17 percent, he says. There aren't additional fees for investments, no matter which funds are chosen.
However, other plans will charge different fees based on which option the customer chooses and the mutual fund families within them, Arizona-based personal financial specialist Jason Washo says. "Sometimes those age-based portfolios and allocation funds have extra fees for what advisers should be doing: helping allocate the portfolio," he says.
[Learn about safe investments in a 529 plan.]
2. Will annual fees outpace earnings? "When you're investing less than $50 per month, you want to carefully review the annual fee price," Washo says. "The annual fees would normally just be an account maintenance fee of $10 or something [similar]." Any adviser or plan representative should be able to calculate whether smaller deposits are worth the investment, Washo says.
For example, if you deposited $10 per month for 12 months, you'd accumulate $120. With a $10 monthly deposit and an annual fee of $10, you'd have to earn more than 8 percent per year to cover the $10 annual fee.
Parents can follow up with a financial adviser or with the plan directly about state tax deductions or matching grants programs that would mitigate the costs of fees, Washo says. For instance, if a resident in Arkansas is eligible for a matching grant equal to his or her total deposits, depositing $25 per month--$300 per year--would accumulate an extra $300. Fees would have to total $300 to nullify the extra deposit.
[Learn more about states that contribute to 529 plans.]
"Have your financial adviser or 529 plan customer service agent calculate your contributions and then subtract fees from your projected annual contributions," Washo recommends. "Make sure that depositing money into a 529 plan will net better results than depositing funds into a bank savings account. Otherwise, it's best for parents to wait until they can contribute more funds," he adds.
3. Who's handling customer service? Experts say that before signing up for any 529 plan, parents should be aware of who will be answering their questions.
In some state plans, the investment management company--which chooses the investments--answers questions via their customer service line, O'Brien says. More often, the plan management company handles customer service. There are also cases where one company, such as Vanguard, handles both investment choices and customer service for some 529 plans.
Meanwhile, for adviser-sold plans, the individual chooses the financial adviser he or she would like to work with. The important skill any of these individuals should have is the ability to answer your questions in a way that you understand, Washo says.
"Whoever answers the phone should be able to answer questions about the plan or be able to direct parents to someone who can," O'Brien agrees. "The exception is if parents are comfortable choosing investment options and doing their own research."
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