repost­ed from US News & World Report
by: Rey­na Gobel

Col­lege sav­ings accounts come with a price. When par­ents com­pare prices on 529 plans, tax-advan­taged col­lege invest­ment accounts, they’re look­ing at what are known as aver­age costs. The aver­age cost rep­re­sents what the aver­age investor pays, but there a lot of choic­es with­in 529 plans that can cause the total price to change for indi­vid­ual families.

There are typ­i­cal­ly dif­fer­ent fees for com­mon invest­ment options. Par­ents should be aware that there is gen­er­al­ly also an annu­al fee on all mon­ey invest­ed in the plan, around half a per­cent of the total mon­ey invested.

Fam­i­lies need to ask plan man­agers or finan­cial advi­sors about the costs of the invest­ment options they have or will choose. Gen­er­al­ly, the fol­low­ing are true about 529 plan invest­ment options.

 

1. Savings accounts are often the cheapest investments 

Sav­ings accounts with­in 529 plans do not have addi­tion­al invest­ment fees, says Mack­ey McNeill, a Ken­tucky-based cer­ti­fied pub­lic accoun­tant and per­son­al finan­cial spe­cial­ist. It’s much like invest­ing in a sav­ings account at a bank – but with­in a 529 plan, an over­all pro­gram man­age­ment fee is charged.

If a fam­i­ly were to put $1,000 into a sav­ings account with­in a 529 plan, they’ll still get charged the pro­gram man­age­ment fee, typ­i­cal­ly 0.5 per­cent, or $5 for the year. To make invest­ing mon­ey in a sav­ings account with­in a 529 plan worth it, they’d have to earn an inter­est rate that’s 0.5 per­cent more than what they’d earn from a local bank.

Anoth­er sce­nario where it would still make sense to invest in a sav­ings account with­in a 529 plan is in a state where 529 plan con­tri­bu­tions are tax deductible.

 

2. Money market funds charge fees, which are taken out of earnings

Mon­ey mar­ket accounts con­tain extreme­ly short-term bonds. Because each bond is held with­in the account for as lit­tle as a few days, there is lit­tle risk for the account hold­er of its drop­ping in value.

This invest­ment option is sim­i­lar to sav­ings accounts because of their rel­a­tive safe­ty, but addi­tion­al fees are assessed. A typ­i­cal fee is 0.05 per­cent to 0.1 per­cent of the val­ue of the mon­ey mar­ket account, says McNeill. How­ev­er, the fees are only tak­en out of earn­ings, she says.

As with any invest­ment with­in a 529 plan, pro­gram man­age­ment fees are also assessed. Because these accounts are rel­a­tive­ly inter­change­able with sav­ings accounts, which don’t have asso­ci­at­ed invest­ment fees, it’s only a worth­while invest­ment choice if the account is earn­ing at least the same per­cent­age as the invest­ment fee and more than a sav­ings account.

 

3. Index mutual funds are cheaper to invest in than mutual funds not based on indexes 

An index fund is a mutu­al fund tied to a finan­cial index such as the Stan­dard & Poor’s 500 index. These invest­ments require less man­age­ment by the mutu­al fund man­ag­er, because the man­ag­er does­n’t have to research indi­vid­ual stocks for the fund.

As a gen­er­al rule, invest­ment fees are assessed based on the amount of research need­ed, says Michael Good­man, a New York City-based cer­ti­fied pub­lic accoun­tant and per­son­al finan­cial spe­cial­ist. Thus, the price is typ­i­cal­ly high­er on non-index mutu­al funds.

Annu­al index fund fees gen­er­al­ly range from 0.1 to 0.35 per­cent of the val­ue of the account, while oth­er funds may charge dou­ble that, or more. Whether a non-index fund is worth the price depends on the fund’s growth his­to­ry and also how much you trust the invest­ment man­ag­er, McNeill says.

Since it’s hard for the aver­age per­son to assess an invest­ment man­ager’s track record, she sug­gests fam­i­lies talk to their plan man­ag­er or advi­sor before select­ing this option.

While these are typ­i­cal costs of each invest­ment option, it’s impor­tant fam­i­lies check the costs with their finan­cial advi­sor or plan man­ag­er before mak­ing any invest­ments. “The fees charged for the same fund in dif­fer­ent state plans can vary due to how each state set up their plan,” says Ted Saren­s­ki, a New York-based cer­ti­fied pub­lic accoun­tant and per­son­al finan­cial specialist.

In New York, for exam­ple, fam­i­lies can choose a plan sold direct­ly or through a bro­ker, he says. The plan sold through a bro­ker­age could include bro­ker­age com­mis­sions and come at a high­er cost.

No mat­ter what invest­ments or plans a fam­i­ly choos­es, the most impor­tant thing is for them to know what they’re get­ting and how much it costs.

Try­ing to save for col­lege? Get tips and more in the U.S. News Col­lege Sav­ings 101 center.

To read the full arti­cle on US News & World Report please click here.