Assets in 529 College Savings Plans grew 4% to a record high of $227 billion in assets in 2015, led by flows into plans sold directly to individual investors, according to Morningstar’s annual study of college savings plans.
Those plans accounted for 80% of asset flows into 529 plans last year; advisor-sold plans accounts for just 20%. As a result, the market share of advisor-sold funds fell to 46.4% of 529 fund assets from 48.1% a year earlier. The share of direct-sold plans rose to 53.4% from 51.9%.
This trend favoring direct-sold funds is likely to accelerate as a result of the Department of Labor fiduciary rule. “It’s going to be much harder to justify the higher fees [of advisor-sold funds],” said Morningstar analyst Gretchen Rupp.
According to the Morningstar report, the average expense ratio at year-end 2015 was 0.47% for 529 plan funds sold directly to consumers and 1.33% for funds sold by advisors. The key reason for the difference: active management. Actively managed 529 funds accounted for 85% of the share of advisor-sold funds but only 16% of direct-to-consumer funds.
But the costs of advisor-sold funds vary widely based on the share class. A shares charge an average front load of 4.75%, while C shares have no front loads but generally a higher expense ratio than A shares. In addition there are also cheaper no-load shares sold by advisors. Advisors, especially fee-only advisors, also have the option of investing clients’ college savings funds in direct-sold 529 funds or they can counsel their clients to choose those funds, according to Rupp.
Overall, fees for 529 funds have fallen, to an asset-weighted average of 0.74% in 2015 from 0.79% in 2014, due to growing demand by investors for less expensive direct plans and low-cost index investments within plans, according to Morningstar. The typical direct-sold plan charges 20 basis points on top of the cost of the underlying funds, while the typical advisor-sold plan charges an additional 70 basis points, said Morningstar. The advisor-sold plan, however, may allow for more investment choices, Rupp said.
Before advisors choose a particular 529 fund and share class, they should first decide whether to invest in a fund based in the state where their client resides, said Rupp. Although 529 plan assets grow tax free and withdrawals aren’t taxed so long as they’re used to pay for qualified educational expenses, only 27 states plus the District of Columbia offer a tax benefit for residents that invest in their state-administered 529 plan, typically some sort of tax deduction.