As if putting a kid through college was not difficult enough, now there are intimations that state-sponsored college savings plans are sticking it to the families who sign up by charging exorbitant fees.
Lest you think that the use of the word “exorbitant” is yet another liberal plot, I have to say here and now that it was uttered by no less than Rep. Michael Oxley, R-Ohio, the powerful chairman of the House Financial Services Committee.
At a recent hearing of the committee’s Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises, Oxley asked, “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?”
You should know that in the time-honored tradition of Congress, this was not really a question. It was the congressman’s way of making a point while seeming to keep an open mind on the issue.
In any case, there were plenty of other parties on hand to testify that “something is rotten in the state of _______.” (Take your choice.)
Morningstar Inc. and other parties said that comparing Section 529 plan costs was all but impossible. This lack of transparency is pretty much built into the system.
The states can set up their own 529 plans, which are not subject to federal securities fee disclosure requirements. Combine this with a myriad of tax breaks that individual states choose to give those who participate in their plan (mostly to residents of that state) and you have the elements of an equation that stumps a lot of people.
To see how difficult it might be for Joe or Sally Public to figure out how much they are paying for the privilege of parking money for little Jimmy’s future education, listen to what Dan McNeela, a senior analyst with Morningstar, had to say.
“Calculating the specific fees associated with a specific investment can be a major undertaking,” said McNeela, explaining that each state uses its own fee structure and discloses those fees at the end of long and complicated disclosure documents (a place most of the public doesn’t get to, presumably).
Now, if it’s that difficult for Morningstar with its extraordinary analytical capabilities, you can only have pity for Joe or Sally Public.
This would seem like a situation where uniform disclosure standards would not only be helpful, but necessary.
Still, you have to wonder how much good even the most transparent comparison system will do. Mathematical literacy has been sliding for years. Math turns off a lot of people and confuses even more. Could a disclosure system be constructed that would ever be simple enough? Perhaps not.
This financial illiteracy is the wall that any attempt keeps running into when the issue is educating the public in their responsibility for their finances. It’s the same wall that accounts for how clueless such a large portion of the population can be about the amount of money they will need to retire on. Do they really think that the $30,000 they have saved is going to carry them through a possible 20 or more years of retirement?
This unwillingness to face reality is a stubborn thing and it makes me think something else is going on. My guess is that these people want it to be like it used to be back in the days when someone else took the responsibility and all you had to do was live to retirement age and then collect a monthly pension check.
These financial illiterates are the same people who don’t use financial advisors or estate planners. They’re not necessarily poor, but they are untutored. Many would be grateful if a life agent contacted them and took some time to show that simple planning is not beyond them. Gratitude being the motivator it is, such actions could lead to some nice business for those agents.
Reproduced from National Underwriter Edition, June 18, 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.