Analyzing 529 Plan Expenses

Shawn Baxter, CAMS, Manager of Centralized Compliance Controls
July 12, 2019

Sooner or later any advisor to families, be they young parents, single parents, grandparents and even other relatives or friends, will get the 529 questions: What is it, and how can I use it to help with educational expenses?

Since its introduction in 1996, 529 plans have become one the most popular ways to save for educational expenses. But, as with any investment, 529s have the same challenges, risks and cost considerations as any other product. As such, it is important that your clients understand how the costs associated with the specific plan (i.e., the fees and expenses of the securities, funds, ETFs, etc.) affect performance and cumulative returns over time and can impact whether your clients reach their ultimate goals.

Many states offer a range of investment choices based on the person’s time horizon and risk tolerance. It is by no means a uniform mix across states, so it is important for you to help your client research the plan, specific options available and what is most suited to their goals.

One important, but often overlooked element, is share class. There are many different share classes available, and you might even find a mix of fund share classes selected for the plan. As such, expenses can vary widely, so it is vital to be involved and ensure that your client’s goals are not eroded by high fees and expenses over time.

Fortunately, there are excellent tools available that make it easier for a client to understand these costs and allow you to choose the most cost-effective share class. For example, financial advisors should utilize the FINRA 529 Plan Expense Analyzer for each client purchasing a 529 plan to conduct a share class cost analysis.

Review the client's existing holdings to determine the total investment amount for the expense analyzer and the proper breakpoint level. The 529 plan's program description provides details on which holdings can be aggregated for breakpoint computation purposes. The assumed rate of growth utilized in the analyzer will be 5 no matter the underlying investment options. This is the standard rate of return used by fund companies in prospectuses when comparing the effects of share classes on the growth of an investment. To calculate the time horizon, subtract the beneficiary's current age in years from 18, which is the endpoint used for the client’s time horizon. Financial advisors need to make sure to use this methodology when completing the time horizon section of new account paperwork.

When you prepare your expense analysis, please keep in mind the above-listed suggestions related to the hypothetical rate of return, the time horizon for the client and the breakpoints.

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