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Should a Financial Advisor Be Handling Your College 529 Plan?

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529 plans are an amazing way to help your child (or another young person in your life) save for college. These plans offer tax-free growth if you use the account for higher education expenses, meaning that any withdrawals you make are completely tax-free. Tax-free growth is superior to the tax-deferred growth you get in your Traditional IRA or 401(k). How can you possibly beat that?

When it comes to choosing a 529 plan, many investors go through an advisor without realizing that there's a lower-cost option available, a state-directed plan which bypasses the advisor. Are the extra advisory fees really worth it?

Choosing a 529

Direct 529 plans are sold by individual states and generally feature passive portfolios, so fees are much lower. Advisor plans are sold through a financial advisory (JPMorgan, in the case of New York) and usually have more investment options and actively-managed portfolios. On the other hand, they also come with higher fees.

In my experience, most people set up their 529 account with an age-based portfolio and just leave it alone and simply add money over time. An age-based portfolio automatically adjusts as your child approaches college-age, moving the holdings towards more bonds and cash and away from equities.

Once these accounts are set up, there typically isn't a lot going on; 529s are often set-and-forget portfolios without much advisor interaction. In that case, you might wonder if it's really worth it to pay the extra fees for an advisor 529 plan, as opposed to a direct 529.

Which one is right for you?

The cost difference between plans is usually significant: In New York, direct plans charge a flat 0.17 percent expense ratio, whereas the advisor plans charge from 0.65 percent to 1.40 percent for "A shares," which also come with an upfront sales charge of up to roughly 5.25 percent. "A shares" can make more sense if you're going to be holding them for a long time because they have lower annual fees than "B" and "C shares," but you need to do your due diligence. To learn more about mutual fund fees, take a look at this article.

A higher fee might be worth it if you can enjoy better returns, so I'd encourage you to also take a look at performance. If the direct plans perform better, then it's a no brainer: Better performance and lower fees means more money for college. But if the advisor 529 is a better performer over the long run, even with the additional fees, then obviously it's worth considering. It can be somewhat difficult to compare apples to apples when looking at the performance of different funds, but I do recommend trying. Also, it doesn't just come down to performance, you'll need to consider how much risk you are taking for that return over time.

Finally, consider the investment options. If your advisor is using an age-based plan, then there might not be a big benefit to having an advisor, so the cost-benefit comes back to fees and performance. If you enjoy the comfort of having an advisor to call to ask questions and make changes, then you might prefer the advisor 529s.

3 Things You Should Do No Matter What

Whatever you choose, there are three things that you should definitely do:

1. Open a 529 account. This is an incredible way to save for your child's future because of the potential for tax-free growth. You don't get compelling investment opportunities like this very often, so take advantage! Most states will offer a tax break on contributions up to a certain limit, though some states do not. Be sure to double-check -- a great resource for this kind of research is Saving For College.

2. Set up automatic contributions. Don't miss out on tax-free growth by forgetting to contribute or by losing track of the time. My daughter is going to college next year, and I can tell you firsthand that the years flew by. Make savings automatic by having your contributions deducted directly from your bank account.

3. Remember that this is still an investment. All investments can lose money, so be sure to allocate your savings to the portfolio that is most appropriate for you and your risk tolerance level. If that means moderate growth, that's okay. The most important thing is that you're saving for your child -- and still sleeping at night.

Written by Bradford Pine with Anna B. Wroblewska. Learn more about the Bradford Pine Wealth Group here.

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