I’ve written before about what I consider the two best 529 college savings plans: the Nevada-sponsored Vanguard 529 plan and the Utah-sponsored my529 (formerly UESP). In general, most people making contributions in excess of their in-state tax deduction for 529 plan contributions (if any) should consider using one of those two plans, thanks to their broad range of low-cost, passively-indexed investment options.
On July 11, I received an interesting e-mail from my529, where I keep my own 529 assets, which contained references to the following program changes:
- “Reduction of the Administrative Asset Fee for all investment options
- “Elimination of the Public Treasurers’ Investment Fund investment option
- “Increase in the Utah state income tax credit/deduction
- “Update of year-end deadlines
- “Reduction in some underlying operating expense ratios”
Obviously any reference to “reductions in fees” gets my attention, so I opened up the new Plan Description and dug into the details.
My529 introduced variable administrative asset fees
When I wrote in February, 2018, my529 charged a flat 0.20% administrative asset fee in addition to the expense ratios of your underlying investment options. As their e-mail states, that fee has fallen for all investment options, but it is also no longer constant: their pre-packaged investment options now charge between 0.10% (“Fixed Income”) and 0.13% (all others), while customized investment options now charge 0.18%.
To be clear: no one is paying more under the new fee regime. However, those who invested their my529 assets in pre-packaged options saw a bigger fee cut than those of us in customized investment options.
Consider simplifying your my529 asset allocation
Since I don’t have any children yet, my 529 assets are invested for the very long term, i.e., entirely in stocks. When my529 charged a flat 0.20% asset allocation fee, I used the “customized static” option to allocate 65% of my account to the “Institutional Total Stock Market Index Fund” and 35% to the “Total International Stock Index Fund.”
Under the new variable fee regime, that asset allocation cost a total of 0.218%: a weighted 0.038% fund expense ratio and a flat 0.18% asset allocation fee.
Meanwhile, the pre-packaged “Equity—30% International” investment option has a total cost of 0.156%: a weighted 0.026% fund expense ratio and a flat 0.13% asset allocation fee.
I want to stress that these options are not exactly identical: the pre-packaged portfolio has a slightly smaller allocation to international stocks, and the international component is invested only in developed markets, while the Total International Stock Index Fund I had been using includes some exposure to emerging markets. Nonetheless, those differences struck me as minor enough to happily make the switch, on the basic premise that the fewer fees I pay, the more money I get to keep, no matter what the stock market does.
How do the new my529 fees stack up against Vanguard?
Of course, these changes weren’t made in a vacuum: Vanguard has also been aggressively reducing the cost of their investment options. Vanguard uses a slightly different method to calculate expenses, but their “Vanguard Total Stock Market Index Portfolio” costs a total of 0.15% and their “Vanguard Total International Stock Index Portfolio” costs a total of 0.195%,” which means (almost) replicating the my529 “Equity—30% International” allocation would have a weighted all-in cost of 0.1635%.
Most people don’t have 529 college savings plans, and most people who have 529 college savings plans don’t have more than a few hundred dollars in them. They were conceived, birthed, expanded, and are passionately defended by the wealthiest people in the country, those willing to do absolutely anything to minimize the taxes they pay on their investment income.
If that describes you, make sure you’re not overpaying for your investment allocation, and don’t be afraid to switch between plans if lower-cost investment options become available (however, note that under some circumstances rolling 529 assets from one plan to another may require you to repay any in-state tax deduction you took for your contributions in prior years).