What You Need to Know
- Direct-sold 529 plans charge an average fee of 0.35%, compared with 0.89% for advisor-sold plans.
- Direct-sold plans have become “increasingly popular with cost-conscious fee-only financial advisors.”
- More plans have adopted progressive glide paths to reduce equity allocations over time.
When it comes to 529 plans, cheaper is better, and that favors direct-sold rather than advisor-sold plans, according to Morningstar’s latest annual report on these plans.
Fees have fallen across both types of 529 plans, reflecting cost cuts across the investment industry, but they have fallen more for plans sold directly to investors, which charge 0.35% of assets, compared with 0.89% for advisor-sold plans, according to Morningstar.
Advisor-sold plans have higher costs because they tend to favor more expensive actively managed funds, as opposed to index funds that are favored by direct-sold plans, and because they usually include 12b-1 distribution fees paid to advisors in their expense ratios.
“When viewed through this lens, the fee burden placed on investors in advisor-sold plans looks particularly hefty,” reads the Morningstar report written by Madeline Hume and Emory Zink, analyst and associate director, respectively, of Morningstar’s Multi-Asset Manager Research.
“All else equal between two plans, the cheaper one will deliver better results for beneficiaries,” according to the report, which studied 83 plans — 54 direct-sold and 29 advisor-sold.
Advisor-sold plans are not necessarily favored by financial advisors. Direct-sold plans have become “increasingly popular with cost-conscious fee-only financial advisors,” growing at a 15% annual rate over the nine years ended Dec. 31, 2020, according to Morningstar. That compares with 10% growth for advisor-sold plans, which are primarily sold by commission-based advisors.
The Morningstar report notes that lower-fee plans have a competitive advantage because they “present lower performance hurdles, putting less pressure on portfolio managers to take more risk to make up their funds’ costs. … Low fees, however, are a dependable advantage that compounds over time and lead to better investor outcomes.”