Quick Question -

My 529s are with Capital Group / American Funds. The two funds have expense ratios of .67 and .99 which I am now learning may be on the high side. My returns have fluctuated around 10% annually for last few years.

My question is based on expense rations are there some valid alternatives I should be looking at to hold on to more of my money?

Thank you,

I use Schwab:

"The Charles Schwab 529 Education Savings Plan offers a range of investment options with varying expense ratios.
Here's a breakdown:

• Index Portfolios: These portfolios, which are passively managed, have an all-inclusive fee of 0.20%."

mosdefn14 said:

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Unpopular opinion, but 47 bps cheaper on $100k is $470/year, or a meal at 5 guys once a month...most people don't have $100k in the 529 for more than a few years.

Being allocated correctly in well managed funds with reasonable expenses for 18+ years >>> incorrectly allocated with cheapest expenses for a few.

10% returns over the last few years is an allocation problem, not an expense ratio issue. There's a 47bp disparity in a growth fund vs a value fund 4 days each trading week.

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thanks for the feedback. so if I am making 10% YoY growth are you suggesting that is low? thank you

fulshearAg96 said:

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mosdefn14 said:

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Unpopular opinion, but 47 bps cheaper on $100k is $470/year, or a meal at 5 guys once a month...most people don't have $100k in the 529 for more than a few years.

Being allocated correctly in well managed funds with reasonable expenses for 18+ years >>> incorrectly allocated with cheapest expenses for a few.

10% returns over the last few years is an allocation problem, not an expense ratio issue. There's a 47bp disparity in a growth fund vs a value fund 4 days each trading week.

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thanks for the feedback. so if I am making 10% YoY growth are you suggesting that is low? thank you

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this board wants you in 100% growth equities all the time. No such thing as risk or a down market.

I don't know your kids ages or your risk tolerance, or the allocation within your account, so can't say. If they're 3 and you are an aggressive investor, might be worth looking at. If 18 and you're conservative, maybe worth looking at as well.

My point was just with any investment account, allocation and selection is going to drive 99% of the returns. Far too much energy is spent on minimizing costs, while what matters (allocation & batting average of active management) is often ignored.

got it... thanks

mosdefn14 said:

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I don't know your kids ages or your risk tolerance, or the allocation within your account, so can't say. If they're 3 and you are an aggressive investor, might be worth looking at. If 18 and you're conservative, maybe worth looking at as well.

My point was just with any investment account, allocation and selection is going to drive 99% of the returns. Far too much energy is spent on minimizing costs, while what matters (allocation & batting average of active management) is often ignored.

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I respect what you're saying, but 529 plan choices are pretty generic when it comes to asset allocation, so you'll probably be OK whether it's index or managed funds.

Sure, it's only half a point of performance or so that you're giving up, but I know people who will crawl through glass to get a quarter-point more on their CDs or money market funds. Why should a 529 be viewed any differently?

I get that the difference is minimal, but unless you're sustainably gaining any performance edge, there's no real reason to choose a costlier option.

Ok let's assume that allocation is the same across two plans. Big assumption, and there are huge disparities between how good the target date funds in them are managed/allocated/glide/perform.

Would you prefer a plan that is cheaper and only tracks the index, or only offers target date funds, or only has one manager who may be really good at only one type of investing (US LC growth, or mid cap value, or emerging markets), or one that glides down too early or has a hard allocation to commercial real estate or long term bonds when you know to avoid those areas in a specific part of th cycle...

...or another that is 47bps more but has best of class managers in each sleeve, a better glide path, and options for both active and passive management? I want the 2nd, and I'll argue that it's worth far more than 47bps to get that.

Gotta compare the Toyota (good and fair priced) to a Lexus (more expensive, but likely worth it)...not a Mitsubishi.

mosdefn14 said:

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Ok let's assume that allocation is the same across two plans. Big assumption, and there are huge disparities between how good the target date funds in them are managed/allocated/glide/perform.

Would you prefer a plan that is cheaper and only tracks the index, or only offers target date funds, or only has one manager who may be really good at only one type of investing (US LC growth, or mid cap value, or emerging markets), or one that glides down too early or has a hard allocation to commercial real estate or long term bonds when you know to avoid those areas in a specific part of th cycle...

...or another that is 47bps more but has best of class managers in each sleeve, a better glide path, and options for both active and passive management? I want the 2nd, and I'll argue that it's worth far more than 47bps to get that.

Gotta compare the Toyota (good and fair priced) to a Lexus (more expensive, but likely worth it)...not a Mitsubishi.

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I'm guessing you're an advisor (this sounds straight out of the advisor textbook), and that's great!

Some counterpoints for consideration:

- I generally agree with you on target date funds, but I use regular passive indexes (aggressive, moderately aggressive) for the Schwab 529.

- Studies show that actively managed funds outperform indexes 35% of the time, which tells me that I'm better off 65% of the time by going with indexes. That is, unless you can identify those "best in class" managers that always outperform the indexes, and if they happen to be offered in a 529. If you do, share it with the rest of us! By the way, your statement that "you know" which sectors to avoid is a dead giveaway that you don't believe in efficient markets theory, which is also OK.

I like getting the Lexus for at least a 50bp discount, myself.

My financial advisor that I use charges like a 5% one time upfront cost on the funds for the 529 thru Wells Fargo

But once I reach certain total with WF, whether its savings, brokerage, 529, IRA...etc my brokerage cost drops from 1.1% to 0.75%

Good discussion, and I'll die on the hill. Clearly different views, and that's ok.

There are a lot of crap funds, just like there's a lot of crap auto manufacturers. Your 65% of the time stuff, same thing... 65% of 30 year old vehicles aren't on the road still but you can make an educated guess which car will last you and which won't. Same with picking managers. Most don't do what they're supposed to, but a lot do...very consistently. And yes, there are plans that have those managers available alongside passive indexed sun accounts.

And honestly my biggest beef with 529s is the passive target risk models. They look backwards too much. Most aggressive models are going to have 30 some odd % international exposure. Going back to the financial crisis until late last year, you could look at interest rates, currencies, and earnings across geographies and pretty easily know you should underweight international equities. Most models don't do that. You more than made up the price difference by overweighting US vs Global.

Most passive moderate models had a huge exposure to LT bonds while rates were near zero going to 4+. You got hammered in 2022. A bond manager who stayed short more than paid for a decade of extra fees in that year alone.

Your advisor sold plan should let you buy load waived A shares. At a minimum, they should allow you to buy convertible Cs.

mosdefn14 said:

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Your advisor sold plan should let you buy load waived A shares. At a minimum, they should allow you to buy convertible Cs.

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I think we do that as gets a little closer to college. Right now its 10 or 12 years off

utah is great

Anyone paying a 5% load plus an asset percentage is getting screwed. And your internal fund fees (the original question on this thread) are most likely higher.
If you're using an advisor American Funds are probably your best option. I was an advisor, I always told my clients to get a 529 from Fidelity or Vanguard and use an Index 500 fund. And frankly clients could have done that with all of their stuff. But there are other reasons to use an FA, or so I've heard.

I have American funds - I went the route of choosing target date fund and let is passive glide path... I have some old 529s inherited by grand parents that I use for the kids schooling. The biggest pain in the behind is moving 529s between accounts - I wanted to move to Vanguard but man dealing with them is sometimes such a hassle.

$200/kid monthly auto deposit after initial few thousand dollar seed deposit.

Have used the Utah plan for over 10 years now and have been happy about it. Aggressive glide path option has worked well.

We've been contributing $240 per month since literally the week after each of our kids were born, and we get the occasional gift from family to add to it. We have the Virginia plan via American Funds. I've kept the money split amongst 3 different growth funds the whole time, even in the market dips. Our son is starting college next week, and at the time of the first withdrawl we had over $130k in the fund. It should pay for 6-7 semesters if the market gives modest returns. It's cool seeing that return graph go exponential at about year 10.