The Fine Print On College Plans

Fees on Vanguard 529s vary by state. The more you pay, the less the long-term return

Mutual fund giant Vanguard Group supplies low-cost funds to 15 state-sponsored 529 college savings plans. But not all the plans are equally low in cost. In 529s where Vanguard teams up with rebate-outfit Upromise to provide administrative services -- or where Upromise runs the plan alone -- account holders may be paying up to twice as much in fees as their counterparts in other plans with Vanguard funds. "Vanguard and Upromise charge a premium," says Kerry O'Boyle, a Morningstar (MORN ) 529 analyst.

John Heywood, a principal at Vanguard, says Vanguard and Upromise offer "top-notch 529 service capabilities," such as the ability to switch investments and withdraw money for college online. If you register for the free rebate program at, a percentage of the purchase price for thousands of products can be transferred automatically to your 529.

The fees on all 15 plans that feature Vanguard funds are still well below average for 529 plans as a whole. But if you've got a choice between the same Vanguard investments in plans with varying fees, you must decide whether the extra services you'll get are worth a premium, since you will earn better returns over the long run in the lower-cost plan. The parent of a newborn who invests $12,000 a year over the next three years in the Vanguard Total Stock Market Index Fund in Nevada's Vanguard 529 College Savings Plan will have $102,503 after 18 years, provided the portfolio returns 7% a year and the fees remain at 0.62%. The same investor will amass 5% more in Virginia Education Savings Trust, which an out-of-state resident can get for 0.33%.

Among the 529 plans that feature Vanguard funds, four contract with Vanguard and Upromise for services such as tracking returns and maintaining call centers. In addition, Upromise administers two more plans, Nevada's Upromise College Fund and Arkansas' GIFT College Investing Plan, by itself. On average, the six plans charge administrative fees of 0.45% to 0.51%. That's significantly more than the 0.29% average for the nine other plans that use Vanguard funds, but go elsewhere for administrative services. (You can find a breakdown of plan fees in the "program description" on your 529 plan's Web site.)

The higher adminstrative fees push the average total cost of the Vanguard/Upromise plans to about 0.70%, vs. 0.35% to 0.52% -- depending on the investments you pick -- for the other Vanguard plans. As a result, you can get Vanguard funds from 529s in Utah, Ohio, and Wisconsin for 25% to 70% less than in Arkansas, Colorado, and Nevada plans.

That's not to say that you should avoid 529s run by Vanguard and Upromise, which are slated to take over Missouri's plan in May. Indeed, if you've got a small amount to invest, be wary of lower-cost plans that tack on extra fees for out-of-state residents. Utah charges nonresidents a $25 annual account maintenance fee. While that's no big deal if you're investing $50,000, it adds 0.50% a year to the cost of a $5,000 account -- inflating total fees considerably.

You may also qualify for a state income tax deduction that offsets the higher fees you'll pay in these plans. But otherwise, why pay higher fees if you can find the same investments for less elsewhere?

By Anne Tergesen

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