College tuition tends to rise faster, year to year, than other stuff Americans pay for. Like health care and military weapons, which are also bought with public funds (or at least government aid), college seems to resist some of the usual laws of supply and demand, and inflates automatically.
To help parents help kids trim college costs, and save them from relentless student loan debt, Congress gave the Internal Revenue Code its Section 529, for saving for college, tax free. Americans have set aside more than $32 billion in tax-protected 529 savings plans, the Federal Reserve reported last year.
There’s at least one 529 plan sponsored by every state. Although when you start taking a look at the plans, you might wonder why some states bother. Measured by dollars, these plans are lopsided.
Under-populated Nevada has attracted $22 billion to its 529 programs, more than twice as much as neighboring California, the most populous state. Pennsylvania and New Jersey state-sponsored 529 savings are also smaller than their populations would make you expect, each in the neighborhood of $5 billion, according to the Fed.
Virginia has the most-popular plan, with around $70 billion. More on why that is, a little later.
Pennsylvania offers a 529 plan featuring funds from home-state provider Vanguard Group, which earns its reputation for low fees. But when you go to Vanguard’s college-savings website, and tell them you’re from Pennsylvania, you start to see why the state’s program might not be a little more popular.
As Vanguard spokeswoman Emily Farrell points out, you can get similar tax benefits from a different state’s plan (best to check a particular plan against your own state’s rules.) 529 plans are like E-ZPass: you might find one in another state that has features you like better than your own, with comparable savings.
Pennsylvania is one of a minority of states that gives full tax savings to out-of-state 529 plans, said Treasury spokesman Michael Connolly, and has “by far” the largest deduction for college contributions — $15,000 a parent a year.
And Vanguard helps you choose: Instead of sending you to sign up with its funds in the Pennsylvania 529 program, Vanguard confronts the visitor who hits the Pennsylvania button with a comparison between the Pennsylvania 529 Investment Plan offering those Vanguard funds, against Vanguard 529 plan offered by Nevada.
The Nevada plan gives you more Vanguard choices, and mostly lower fees -- for example, 15 basis points (0.15%) for the Vanguard 529 plan sponsored by Nevada for “age-based” options that shift from stocks into bonds as college gets closer, versus 24 to 28 basis points for the Pennsylvania 529 Investment Plan. Pennsylvania does a lower threshold: You can sign up with just $25, compared with $3,000 in Nevada.
As fans of the late Vanguard founder John Bogle know, those fees add up over the years, for parents saving for college.
So why is the Vanguard plan from Nevada cheaper than Vanguard funds in Pennsylvania’s plan? Ask Harrisburg, the Vanguard rep told me.
Officials at the Pennsylvania Treasury department, who inherited the plan from previous administrations, say Nevada got into the business early and got big quick, so it was able to negotiate lower fees.
Pennsylvania has been pressing Vanguard to get its fees down, and they’re lower than they used to be, state treasury spokesman Connolly told me. Pennsylvania also has a “unique” second 529 choice, the Guaranteed Savings Program, a more flexible version of the pay-in-advance discounted tuition programs some universities offer.
Virginia, with the biggest 529 plan, is also one of a few states whose plans are widely sold by investment brokerage offices. The fact those plans have attracted tens of billions more than other plans, because more people are out there selling them and collecting commissions, looks like confirmation of the old broker’s motto: “Financial products are not bought, they are sold.”
Sold a little too hard, maybe: The brokers’ self-regulatory body, the Financial Industry Regulatory Authority (FINRA), has demanded that brokers who sell 529 plans “self-report” any excess fees they are charging by April 1, or face unspecified consequences.
““Firms that fail to assess their historical 529 Plan sales-recommendation procedures may face serious sanctions if FINRA later identifies any suitability deficiencies.”according to Richard Margolies, partner in the securities enforcement and regulation group at law firm King & Spalding in New York.
If FINRA finds brokers have been ripping off college savers, that would reflect poorly, not only on any brokers found to be overcharging, but also on state college savings managers asleep at the switch. “This becomes a hot-button political issue,” since state officials who set 529 plan terms are often the same people who are supposed to be ensuring consumer protections, Brad Bennett, FINRA’s former chief of enforcement, told me. .
They are reluctant to blame themselves for any problems, Bennett candidly added that he couldn’t remember FINRA sanctioning a broker for overcharging on 529 fees, up til now.
It’s important for 529 savers is to know in advance the fees they are committing to pay, Bennett concluded. “The number one problem with college savings is, people don’t save. Number two is fees.”
An irony in Pennsylvania is that tuition at Penn State and other state-backed schools, and at state universities, has been driven up by the relatively generous pension and health benefit programs for retirees and veteran former employees. For every dollar paid to professors and other staff, another 30 cents plus goes into keeping the State Employees’ Retirement System (SERS) solvent. Retiree health care is an even larger, and a fast-growing, expense.
Just as Vanguard and other money managers compete to run states’ 529 plans and gain savers’ assets to pay for college, so also do money managers compete to invest billions for SERS and other state pension plans funded by taxpayers. SERS executive director Terrill Sanchez told legislators at Tuesday’s annual budget hearing that the surcharges should level off in the next few years, and SERS assets should finally match its liabilities, under current assumptions, by about 2040.
By then, most state college employees will have lower pension guarantees, under a law signed by Gov. Tom Wolf that start taking effect for people hired this year. So that part of the problem will dissipate. (Though who knows how many Pennsylvania state colleges will still be in business by then? The state’s average age is now over 40, compared to 32 in, for example, Texas.)