College savings plan thrives
Georgia's version is well-regarded in all areas
By HANK EZELL
Cox News Service
November 6, 2005
Georgia's college savings plan continues to make itself attractive, in part by slightly lowering its fees, in part by making sound profits on its investments and in part simply by keeping its nose clean.
Besides, many Georgia residents can get a break on state taxes by putting their college savings into the Georgia Higher Education Savings Plan.
There is plenty of competition. Every state and the District of Columbia now offers 529 college savings plans, named after the section of tax code that makes the tax breaks possible.
Big money is involved. As of March 31, $67.51 billion was invested in 529 plans nationwide. About 7.5 million families had accounts, according to the College Plan Savings Network, an association of 529 managers.
A total of 60,467 families had accounts in the Georgia plan as of Oct. 23, said Director Chuck Penuel. Their investments totaled $304 million.
That represents rapid growth: A year earlier, Georgians had about 46,300 accounts representing $197.1 million.
The plans are popular mainly because of the tax breaks. Taxes are deferred on investment earnings, and investors pay no taxes at all when they take money out, if they use it for educational expenses.
Each plan is sponsored by a state government, which sets up the program and hires a financial service company to provide appropriate mutual funds and manage it. Usually that works fairly well, and it leaves the state free to make improvements as it goes along.
Last month, for example, Georgia regulators lowered the annual expenses paid by investors. An account holder now forks over 0.78 percent of his total account each year, down from 0.85 percent.
That's 7 cents savings on every $100 invested, but it shows the managers' hearts are in the right place and their hands are not reaching for your wallet.
Georgia a low-cost state
Georgia's plan has always been in the low-cost tier. A major reason is that investors open accounts directly with the state, rather than going through a stockbroker or other financial adviser. Use an adviser and you will pay an upfront fee, sometimes 5 percent or more, for the service.
There is also a chance that the adviser will serve himself first, then you. Recently, Ameriprise Financial agreed to pay a $500,000 fine and $750,000 in compensation to customers who bought into a Wisconsin 529 plan on the recommendations of Ameriprise employees. Regulators said the investors could have done better by investing in their home-state plans. The company, formerly American Express Financial Advisors, did not admit or deny the allegations.
Investment returns in Georgia's plan have been respectable. Investors can choose among a number of investment plans, ranging from very conservative to 100 percent stocks.
In the middle is a balanced option, which holds roughly 50 percent stocks and 50 percent bonds. Total return was 9.95 percent for the year ended Sept. 30, Penuel said. Since the fund opened about 3 1/2 years ago, average annual return has been 7.49 percent.
"That's pretty good," said Joseph Hurley, founder of www.savingforcollege.com, author of a book on 529 plans and one of the recognized gurus on the topic.
Earlier this year, Hurley surveyed returns from the scores of 529 investment options in various states.
Over the preceding year, Georgia's balanced option ranked eighth out of 110 similar plans. Some states offer the same plan in several share classes. Only 60 of them have been around for three years or more, and Georgia's plan was ninth among those.
Scandals have occurred in some states, but not Georgia. From the first day, Georgia's plan has been with TIAA-CREF, a respected and scandal-free investment firm better known for managing college and university retirement funds. Other states, including Wisconsin, started out hiring hometown firms, then backed away from them after scandals.
Theft in Utah
Plain old theft was the problem at Utah's often-recommended plan. Director Dale Hatch was fired when he pleaded guilty to stealing money from the plan. Utah officials have made a number of changes since then.
Still, 529 plans are a good way to save for college expenses. Shopping can be a problem, however, because there are so many plans to choose among. Here are some ideas to keep in mind as you look them over.
• Don't pay too much. If you buy through a broker, some of your money will disappear in commissions. Even if you do it yourself, watch out for high annual operating expenses. You can find plenty of options for less than 1 percent.
• Don't overlook the home field advantage. Georgia and most other states offer breaks on state income taxes. In Georgia, families under certain income levels can cut their tax bill by as much as $120.
• Don't get greedy. If you put 100 percent of your investment into stocks — Georgia and other states allow that — you face the risk that the market might crash just before your child goes to college. Could you make big money? Sure. But if the market goes against you, do you want to explain it to your son or daughter?
Bear in mind that it's possible to save too much in 529 plans. If you take money out of the account for anything other than qualified college expenses, you will pay ordinary income tax rates on your earnings — not capital gains rates — and a 10 percent federal tax penalty.
• Keep it simple. In Georgia, college savers have put two-thirds of their money into "managed allocation" options. These are set-it-and-forget-it deals, much like life-cycle mutual funds — as your child gets closer to college age, more of your savings are switched out of stocks and into conservative alternatives, including bonds and money markets.
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