More Fee Disclosure Sought For College Savings Plans

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Comparing Section 529 college savings plan program costs is next to impossible.

College savings plan experts from Morningstar Inc., Chicago, and other organizations made that complaint at a recent hearing of the U.S. House Financial Services Committee’s Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises.

Committee Chairman Michael Oxley, R-Ohio, suggested that disclosure problems may be hurting the performance of the plans.

“Have the fees charged by these state-sponsored plans become so exorbitant that they actually outstrip the tax benefits that Congress has attempted to provide?” Oxley asked at the hearing. According to a written version of his remarks, “have the states established adequate procedures to monitor the performance and operation of the investment managers they hire to run their plans?”

Rep. Paul Kanjorski, D-Pa., the senior Democratic member of the subcommittee, talked about efforts by state regulators and agencies such as the National Association of Securities Dealers to respond to 529 plan program growing pains.

“It is very important to study these issues and for state and federal regulators to take coordinated action to protect the families who invest in 529 plans,” Kanjorski said. “Greater standardization in disclosing fees and expenses will facilitate direct comparisons in performance between the various 529 plans across state lines.”

Section 529 of the Internal Revenue Code gives each state the authority to set up its own 529 college savings plan programs. The law exempts taxpayers from paying federal income taxes on contributions and normal distributions. States can offer participants breaks on state income taxes.

Once a state sets up a 529 program, it can open the program to all U.S. taxpayers, but the breaks on state income taxes are usually available only to residents of the sponsoring state.

The college savings programs ended the first quarter with 6.5 million accounts and $51 billion in assets, up from 2.4 million accounts and $13.6 billion in assets at the end of 2001.

Each state is in charge of setting up its own 529 program, and, technically, interests in 529 plans are state-regulated municipal securities that are not subject to federal securities fee disclosure requirements or other federal securities laws, according to Mercer Bullard, president of Fund Democracy Inc., Oxford, Miss., a mutual fund shareholder advocacy group.

State moves to offer state income tax breaks only on investments in home state 529 programs limit program competition, Bullard said.

Each 529 program uses its own idiosyncratic fee structure, and most disclose the fees at the end of long, complicated disclosure documents, according to Dan McNeela, a senior analyst with Morningstar.

As a result, “calculating the specific fees associated with a specific investment can be a major undertaking,” McNeela said.

Costs at some plans exceed 2% of assets, and front-end sales costs can be as high as 5.75%, McNeela said.

Bullard recommended that Congress ease consumer confusion about 529 plans by setting uniform 529 plan fee disclosure standards, giving the U.S. Securities and Exchange Commission responsibility for regulating 529 plan fee disclosure and limiting 529 plan distribution fees.

Congress should set a 3% limit on 529 plan commissions and a 0.5% limit on 12b-1 trailing commission fees, Bullard said.

Officials with the College Savings Plans Network, Lexington, Ky., argued that states already are moving to increase uniformity, cut costs and address investment management problems.

“While disclosure information should be standardized across the 529 industry, each state must be able to shape and define its own plan to meet the unique needs of its citizens,” said Jacqueline Williams, a member of the plans network executive committee.


Reproduced from National Underwriter Edition, June 11, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.