The Associated Press

529 plans' fees, sales face new scrutiny

Regulators and legislators are looking at the popular college-savings plans.

By Marcy Gordon

Posted June 3, 2004 WASHINGTON -- Lawmakers and regulators are examining the fees charged by popular college-savings plans, and an investigation of big brokerage firms' sales of the plans has widened.

An investor advocate told a House panel Wednesday that states may have incentives to sponsor so-called 529 plans with high fees and that political factors can play a role in pushing up charges.

"Political considerations . . . may influence the selection of money managers and cause states to be less diligent when negotiating fees," said Mercer Bullard, a University of Mississippi law professor who heads the advocacy group Fund Democracy. He testified at the hearing of the House Financial Service subcommittee, which was examining the plans used by parents to save for their children's college tuition.

Bullard cited examples of states favoring investment firms based in the state or firms whose executives contributed to the election campaigns of state officials. He urged the lawmakers to consider imposing limits on fees charged by the plans, which are not subject to federal income taxes and sometimes are deductible from state taxes.

More than $35 billion is invested in 529 plans, which were established by Congress in 1996 and are named for the corresponding provision in the federal tax code.

Securities regulators, meanwhile, have expanded their investigation of brokerage firms' sales of these 529 plans for possible violations that can deprive investors of the very tax benefits that make the plans attractive.

The National Association of Securities Dealers now is examining sales of the plans at 15 major investment firms, NASD Vice Chairman Mary Schapiro said. She would not identify the firms.

The securities industry's self-policing organization is concerned that brokers may have sold investors out-of-state plans without clearly explaining to them that they could lose the ability to deduct their plan contributions from their state income taxes. Red flags went up, Schapiro said, when NASD examiners found that for some investment firms, more than 90 percent of sales of the plans were going to nonresidents.

"Millions of dollars are poured into 529 plans," she said. "They're a wonderful potential investment tool but . . . complicated enough that people really ought to be thinking about this."

The 529 plans are offered by every state and the District of Columbia. The plans usually are based principally on investments in mutual funds.

States generally can increase fees for college savings plans without notifying investors. Some of the money from the fees goes into the coffers of states, many of which are scrounging for revenue in the current economic climate.

Investors pay a number of fees, including enrollment fees, maintenance fees, administrative fees, management fees and, in many cases, brokers' fees. Some are flat charges; others vary depending on the amount of money invested.