Under pressure from Congress and regulators, state operators of Section 529 college savings plans are busily trying to come up with some system that will stave off federal intervention by dealing with complaints that their programs are plagued by excessive fees and unintelligible investment information.
The College Savings Plans Network, an affiliate of the National Association of State Treasurers that represents the plans, recently drew up "voluntary disclosure principles" that would help an investor understand his or her own state's plan and compare it with others, CSPN Chairwoman Diana F. Cantor told a House subcommittee last week.
She said later that the CSPN also hopes to revamp its Web site so that families can use it to evaluate and compare plans.
That would certainly be helpful, but it's going to take a while. Cantor conceded it's unlikely anything will be available even to show Congress until the end of the year. Not only that, but she emphasized that anything her group does must leave room for states to tweak the rules for their plans -- which is, of course, where so much of the confusion comes from in the first place.
Section 529 plans allow families to pre-fund some or all of their children's college costs. The plans actually come in two forms.
There are prepaid tuition plans, in which families buy contracts that promise to pay tuition or an agreed-upon portion of it, no matter what the sticker price may be when the child is ready for college. And there are tax-free investment accounts, which families fund with after-tax money. In these more common accounts -- what most people understand from the term "529 plan" -- earnings inside the plan are not taxed, and neither are withdrawals if they are used for higher-education expenses.
Together the two types now have more than $50 billion in assets -- about $40 billion for the investment accounts and $10 billion in the prepaid plans.
But both types are having problems.
Most of the focus now is on the investment-account type. Although these plans are creatures of the individual states, in most cases the actual money management is contracted out to well-known mutual fund companies, such as Fidelity, Vanguard and TIAA-CREF.
But the plans are not subject to the same rules as normal mutual funds, and critics complain that the plans' performance history is difficult for potential investors to evaluate, and that fees are often high and difficult to sort out. Other rules are unclear as well, critics say. Although federal tax and other laws say what these plans can and can't do, states can -- and many do -- add rules of their own that may be more restrictive.
"Some of our greatest concerns relate to the myriad costs investors pay to participate in a 529 plan. Investors face enrollment fees, account maintenance fees, administrative fees, management fees and in many cases broker fees," Dan McNeela, a senior analyst at investment research firm Morningstar Inc., told the House panel. "Some of these costs are dollar-based, while others vary depending on the amount invested in the plan."
He said a recent Morningstar review of 529 plans "turned up several plans with investment options whose costs approach or exceed 2 percent of assets" for certain classes of shares, and that figure "does not include front-end sales costs, which can be as much as 5.75 percent of assets, or any dollar-based fees." The review also found a number of states with very low fees, he said, notably Utah.
Since 529 plans are typically open to residents of any state, many investors want to find the plan with the best combination of high performance and low fees, and critics say that is too hard to do.
Some states also offer a state income-tax deduction for contributions, which investors need to take into account along with fees and performance.
While investment accounts are struggling with these questions, prepaid plans are being hammered by tuition increases. In fact, Jacqueline T. Williams, executive director of the Ohio Tuition Trust Authority, told the House subcommittee that Ohio has had to close its prepaid plan to new participants because "we no longer could keep up with the cost of colleges and universities in our state." Maryland had to put off new enrollments temporarily two years ago, and Virginia did not hold an enrollment period this year.
Joan Marshall, executive director of Maryland's program, said Maryland has had to raise contract prices 25 percent in each of the past two years, and is anticipating an additional 10 percent boost in the next enrollment season late this year.
The CSPN's Cantor said she is hopeful that Virginia will offer new contracts later this year, but there's likely to be a big price jump.
From parents' perspective, this is a daunting development. What Ohio is in effect saying is that even with professional money managers, the state can't get high enough returns when it invests the purchase money to keep up with tuition rises. If they can't, what hope does the average family have?
Some states are casting about for ways to make their prepaid contracts cheaper, perhaps by selling smaller portions, such as contracts that would pay for a semester instead of a year of college.
It's important to keep the prepaid programs going, Marshall said. "Parents need something to hang on to, especially in this environment."
Insurers, agents and trade groups are urging Congress to get moving and reauthorize the federal National Flood Insurance Program. The industry wants to avoid a rerun of 2002, when lawmakers adjourned and let the program expire for a while.
The NFIP provides coverage for flood-related losses, which typically are not insurable in the private market. It is due to expire again June 30.
Insurers, in a letter last week to Senate Majority Leader Bill Frist (R-Tenn.), called for a five-year extension, and warned that if the program expires again, there will be disruption in the market.