I love New Jersey, but the state’s 529 plan stinks.
The plans are hailed as fantastic college-savings vehicles, and they are. Your money grows tax-free, and most plans offer age-based investment options, in which the fund’s manager invests less aggressively as your child’s target college age draws near.
You can even change the beneficiary of the plan if your eldest child chooses something other than college for his or her future.
Investors can choose any state plan, but many Jersey residents are gravitating to New Jersey’s plan, NJBEST. It boasts accounts for more than 63,000 beneficiaries (through March 31), and year-over-year enrollment is up 25 percent, according to Franklin Templeton Investments, the company that manages the plan.
The plan has had a lot of critics (myself included) because of higher costs and aggressive age-based portfolios. Improvements were made to the plan this year, but are they enough? You decide.
All 529 plans charge a fee for management of the underlying mutual funds. These cover fund manager salaries and trading costs, among other things.</p>
Some plans, including NJBEST, also charge a program management fee. Late last year, NJBEST announced it would reduce its program fee by 50 percent, to 0.2 percent. That’s a good start. But compared with other plans, NJBEST is still pricey; and it’s the program fee, when added to the fund-management expenses, that puts it over the edge.
For NJBEST, depending on the mutual funds you choose, total costs are between 0.4 and 1.07 percent.
A quick tour of other 529 plans via SavingForCollege.com, a 529 plan analysis website, shows there are many plans available at half the cost. ome cost more, sure, but far more cost less.
Franklin Templeton states that investors are getting value for those higher costs.
“Rather than indexed portfolios, which basically have a laptop closing up the day, you’re getting portfolios that are managed with intellectual decisions as to what the portfolios should own,” says Roger Michaud of Franklin Templeton. “That intellectual component costs extra money.”
After expenses are considered, NJBEST portfolios are up 4.29 percent this year (through April 30) and have a 5-year average of 4.54 percent, according to Morningstar.com, an independent investment research site.
Compare that with the Michigan plan, managed by TIAA-CREF, which is touted as a low-expense winner with expenses of 0.45 percent. That plan is up 4.53 percent this year, and averaged 4.11 percent through the past five years.
Vanguard, another firm with a reputation for low expenses, manages New York’s 529 College Savings Program Direct Plan. For a max of 0.49 percent expenses, the plan averaged a 4.86 percent gain so far this year, with a 5-year average of 4.21 percent.
That’s a pretty close run. Without such high expenses, the NJBEST plan would have had a better showing.
PUTTING IT ALL TOGETHER
You might be thinking of NJBEST’s expenses, “That’s just a few tenths of a percent. Big deal.”
Over time, it is a big deal, says Christopher Cordaro, a certified financial planner with RegentAtlantic Capital in Morristown.
Cordaro offers this scenario: Say you’re saving for an 8-year-old’s education, and over the course of the next 10 years, you put away $100,000 in NJBEST. “The New Jersey plan is at least 0.5 percent more expensive than other very good alternatives, and 0.5 percent on $100,000 is $500 a year,” Cordaro says. “Five hundred dollars times 10 years equals $5,000 in higher fees. Think that $1,500 scholarship is worth it now?”
Cordaro is talking about the $1,500 scholarship offered to NJBEST students who attend an in-state school. If your kid’s dreaming of Yale instead of Princeton, you’re out the money.
Michaud argues the $1,500 is worthwhile.
“$1,500 will pay for two semesters worth of books at most schools, with a few hundred left over,’’ he says.
He also estimates 80 percent of students at New Jersey colleges are residents, so the benefit would help a majority of Garden State families. Plus, he notes, the first $25,000 saved in NJBEST is not counted as an asset for financial-aid calculations — something other states don’t offer.
And if you’re ever sued, assets in the New Jersey program are protected from creditors.
“If you own the Texas plan, the Michigan plan, the Florida plan, those are up for grabs,” he says. That’s not enough for me. As a mom of three, I use Michigan’s plan: low expenses, solid performance, wisely managed age-based portfolios. Will my kids head to Princeton?
Who the heck knows. Either way, I’ll be willing to pay those textbook costs out-of-pocket and enjoy lower expenses today.