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These 529 Plans are Superior

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  • These 529 Plans are Superior

    Did some research on 529 plans for our new child since we now live in a different state when we had our first.  Our current state has a bad plan and doesn't offer any benefits for signing up, so my search went nationwide.  See attached file.  I looked at every state (except poor Wyoming that doesn't have a 529 plan) and only included the ones that had any hope of having a weighted average total expense ratio of <0.20%.  For the ones I included I dove into the disclosure documents to get the details.  In some cases the numbers were a bit different from what was advertised on www.savingforcollege.com.  Tried to use the 3 fund portfolio as my guide, but allowed for some extremes of asset allocation (stocks only).  I didn't include any of the age-based funds because they typically have fees higher than the 0.20% threshold and are not what I'm interested in.

    The results were interesting.  If you are a RI resident, congratulations.  You win - markedly lower rates apply to you.  California, Michigan and Arizona are my favorites otherwise, regardless of residency status.  I put DE/NH/MA behind them because you can't change account owners or they have a lower contribution total, even though the fees are the same as AZ (all run by Fidelity).  Nevada's expenses have gone up since I last looked.  They offer a ton of great fund options, but their fees don't justify getting cute with asset allocation in my mind.  Virginia wasn't bad, but their disclosure document stated that you basically have to exhaust the money in the account by 30 years from the beneficiary's 18th birthday.  That will suffice for most people, but if you're trying to move additional funds to a new beneficiary and avoid paying the generation skipping tax you might not be able to get it all out in time.  Uncommon, I know.  NY also required use of at least some of the funds by the beneficiary's 21st birthday or they considered the funds "abandoned".  If you communicate with them about the reasons why it's all good, but beware of this rule.  These results seem to differ from the standard recommendations I've seen.

    Curious to see if anyone has come across other information, problems, etc. that might change this rank order.  Of course, none of this takes into account the specific tax advantages in your given state, which will may change your rank order.  Only a few states (AZ, KS, ME, PA) allow a deduction for ANY 529 contribution, regardless of state.  So if you're in one of those states (or like me where your state stinks) this list may be particularly useful since cost minimization w/ proper asset allocation should be your goal.  Thoughts?

  • #2
    Great work. Interesting to not see Utah on this list. That has been the example in the past when talking about a "good" 529.

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    • #3




      Great work. Interesting to not see Utah on this list. That has been the example in the past when talking about a “good” 529.
      Click to expand...


      I was surprised too, but if you look at Part 8 of the Program Description (starting page 45) you'll see that what kills it (at least for me as a non-Utah resident) is the fact that they tack on a 0.20% UESP Administrative Asset Fee on top of every given fund's underlying expense ratio.  That means at best you're paying 0.22% for the total stock market index fund, 0.27% for total international stock index, and 0.24% for the total bond index fund.  Better options exist for all of those.

      https://uesp.org/wp-content/uploads/2016/09/UESPProgramDescription_dest.pdf

       

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      • #4
        Yea, where the heck are Utah and NY?

        While 529s are always changing, my general recommendations are:

        • UT: For DFA/Vanguard funds and a great history of good management and lowering fees

        • NV: For Vanguard funds and convenience (you can see it when you log in to your other Vanguard accounts)

        • NY: For lowest possible cost


        I see Michigan and California often placed in the second tier, so no problem there.

        I've never seen RI placed into the top category before, so I thought I'd take a look at what you like about it.

        Here's a quote from the Program Description:
        There are no enrollment or maintenance fees to participate in CollegeBound Saver. CollegeBound Saver charges a Total Annual Asset-Based Fee per Portfolio that ranges from 0.04% - 0.60% for Rhode Island Resident Accounts and 0.29% - 0.85% for Non-Rhode Island Resident Accounts.

        0.29-0.85% is "markedly lower rates"? What?

        Oh, wait a minute. You're saying RI residents get great ERs. That's true. They just happen to tack on a 25 basis point fee for being a non-resident. Well, if you live in RI, using their plan is a no-brainer anyway since they give a state tax break for contributions. But I find the case to go there as a non-resident very uncompelling.

        I also find a plan that uses Fidelity funds instead of Vanguard funds to be not particularly compelling. Not that the Fidelity index funds aren't fine, but simply out of loyalty to Vanguard. Everybody knows Fidelity and Schwab wouldn't be offering single digit basis point ERs if Vanguard hadn't done it first.

        I'm also not sure you saw ALL the fees. For example, Arizona charges a 20 basis point fee in addition to the Fidelity fund ERs. How is that any different from UT?

         
        Helping those who wear the white coat get a fair shake on Wall Street since 2011

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        • #5
          And the issues you have with VA and NY? Just do a 529 rollover. Those are no big deal.

          Nevada's 529 ERs might have gone up (I don't know) but you can still get TSM for 19 basis points. That's hardly outrageous. By way of comparison, you pay 22 at UT and 16 at NY. Sure, it's not the 4 you pay as an in-state Rhode Islander...but I don't think I'd choose between them primarily based on the ER.
          Helping those who wear the white coat get a fair shake on Wall Street since 2011

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          • #6
            I still think MA is the best if you're not interested in DFA funds or don't want to set up a fancy-dancy customizable target date plan.

            My total ER will be about 0.13% and my Fidelity index funds are slightly cheaper than Vanguard. Fidelity has excellent customer service and a nice online system when reach withdrawal.

            MA will add a small state tax deduction in 2018.

            I'll grant you it would be nice if they allowed change in ownership, but if I end up needing that I'll just roll over into a state plan that does.

            I don't think a $400k cap on plan assets is a big deal unless you are mostly using for estate planning purposes.

            That said, any of the top plans would be neglibly different.

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            • #7
              I don't know if it applies to other plans, but my Nevada Vanguard 529 plan is linked to upromise so I get some extra savings there.  I just checked, $2.2k in 8 years.  Not life changing, but it is free money.  I also like that my 529 balance is counted toward my total account balance with Vanguard to qualify for some of their perks; before my taxable started expanding, this made more of a difference.  Also, I like having one less place to log into and ease of moving money around.  Again, not life changing.

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              • #8


                Virginia wasn’t bad, but their disclosure document stated that you basically have to exhaust the money in the account by 30 years from the beneficiary’s 18th birthday.
                Click to expand...




                NY also required use of at least some of the funds by the beneficiary’s 21st birthday or they considered the funds “abandoned”.
                Click to expand...


                Helps to read the fine print! If a 529 rollover solves the issue, I guess it's not a big deal, but if you forget to take that step...

                I started ours when we lived in Michigan, which has TIAA-CREF funds. The Global Equity Index Option has total costs of 0.13% with a 70% US Stock / 25% International / 5% Emerging Market allocation. We also got a tax benefit as residents, but we've kept the Plans there since our current state does not offer a tax deduction.

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                • #9
                  I am out of state and use the Nevada Vanguard plan.  I thought that one was good. The result of using my in state plan doesn't make the deduction worthwhile.

                  Comment


                  • #10




                    Yea, where the heck are Utah and NY?

                    While 529s are always changing, my general recommendations are:

                    • UT: For DFA/Vanguard funds and a great history of good management and lowering fees

                    • NV: For Vanguard funds and convenience (you can see it when you log in to your other Vanguard accounts)

                    • NY: For lowest possible cost


                    I see Michigan and California often placed in the second tier, so no problem there.

                    I’ve never seen RI placed into the top category before, so I thought I’d take a look at what you like about it.

                    Here’s a quote from the Program Description:
                    There are no enrollment or maintenance fees to participate in CollegeBound Saver. CollegeBound Saver charges a Total Annual Asset-Based Fee per Portfolio that ranges from 0.04% – 0.60% for Rhode Island Resident Accounts and 0.29% – 0.85% for Non-Rhode Island Resident Accounts.

                    0.29-0.85% is “markedly lower rates”? What?

                    Oh, wait a minute. You’re saying RI residents get great ERs. That’s true. They just happen to tack on a 25 basis point fee for being a non-resident. Well, if you live in RI, using their plan is a no-brainer anyway since they give a state tax break for contributions. But I find the case to go there as a non-resident very uncompelling.

                    I also find a plan that uses Fidelity funds instead of Vanguard funds to be not particularly compelling. Not that the Fidelity index funds aren’t fine, but simply out of loyalty to Vanguard. Everybody knows Fidelity and Schwab wouldn’t be offering single digit basis point ERs if Vanguard hadn’t done it first.

                    I’m also not sure you saw ALL the fees. For example, Arizona charges a 20 basis point fee in addition to the Fidelity fund ERs. How is that any different from UT?

                     
                    Click to expand...


                    This information is current as of today, so while some states may have a historical ranking and low fees others may supplant them over time.  MI and CA are superior for my purposes and for those not trying to get too cute with asset allocation while trying to lower fees.

                    Yes, I was specific in referring to RI residents only - not non-residents.  They were one of the few states that offered different rates based on residency, so thought this was worth bringing to peoples' attention in case they are about to move from there or plan on being a transient there with kids (military for example).  They do not make the list for non-residents.

                    I don't understand your argument re: Fidelity.  All that matters is that they currently charge low fees and that they are likely to continue to do so in order to be competitive.  While Vanguard is a pioneer in this regard, when the total costs are superior with a Fidelity 529 I don't see why allegiance matters.  Costs do.

                    Regarding your assessment of AZ, that 0.20% added fee is for the non-index Fidelity funds only.  It is markedly lower for index funds, which were the only ones I included on my list.  Thus, it is superior to UT, which adds 0.20% to ALL funds (including index funds).

                    Regarding the TSM purchase in NV for 19 basis points, the problem is that if you're seeking any balance to your portfolio this will be the lowest ER you pay, with a weighted average being higher.  The only way around this is to get a fixed allocation fund ("aggressive" for example) that has a 0.17% ER.  But you have to be comfortable with that fixed allocation.

                    Lastly, while it may be possible to transfer 529 funds to another state, there is potential opportunity cost.  Since the market is going up more often than going down, and since a substantial portion of gains are from a small number of days in a given year, you risk loss of portfolio value when changing funds between states.  When all else is equal, the decision to go with one that offers change of ownership is a no-brainer.

                    These decisions are personal, which I was careful to note.  But under circumstances similar to mine, or if you live in one of the aforementioned 4 states offering tax deduction regardless of the 529 invested in, I believe the historical list needs updating.

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                    • #11
                       


                      The only way around this is to get a fixed allocation fund (“aggressive” for example) that has a 0.17% ER.  But you have to be comfortable with that fixed allocation
                      Click to expand...


                      I have the NV Vanguard 529 Age Based Aggressive Portfolio...ER 0.17...however that is not a fixed allocation...it has a, newly revised might I add, glide path that gets more conservative every 1-2 years as the child ages...such that by age 18 it is 90% bond and 10% stocks. For example, age 7 is 80% stock and 20% bond, however for the five year old it's 90% stock and 10% bond.....I'm comfortable, and one must be, with that glide path. That being said it has both a moderate and conservative based portfolio as well with even more conservative allocations and glide paths.

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                      • #12
                        I also go with the NV 529 out of convenience (we live in a state with no state tax, big Vanguard fans)

                        Plan on saving up to a certain amount (250k? Maybe less) and then cash flowing the rest if our children are fortunate enough to get into very expensive / prestigious schools and/or grad schools

                        We are too risk averse to retire before we get the kids through their educational path. They are firmly on their own the second they complete their final graduation ☺️

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                        • #13
                          Most seem to have improved incrementally over time, in investment choices and expenses. My MO plan was once one of the higher expense plans, and it now seems more reasonable. This is one category where I think that the expenses are "low enough" in my state, and I would rather not add the hassle of transferring, etc. YMMV

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                          • #14
                            Ohio is a decent option too. Total annual fees of around 0.2% for individual investment and age based/risk based options

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                            • #15
                              Didn't include MO and OH because the vast majority of the investments were >20 basis points, particularly for the 3 fund portfolio.  If you've already made most of the contributions and your kids are close to college then I agree it probably doesn't make sense to switch.  But if you're just starting out or have a new kid or are in a situation as previously described then 10 basis points can mean >$10,000 of added future value over 18 years, at least per Vanguard's fee calculator.

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