Use Caution On State College-Savings Plans
February 25, 2000
Parents who want to save for their youngsters' college expenses, and who are tempted by savings funds being run by the states, might want to look into the plans quite closely. And that is not just because the plans of Rhode Island and Connecticut have been thrown into turmoil recently by a scandal involving alleged kickbacks, and federal racketeering and money laundering charges.
Presumably, most state plans if not all others are honest and above board. But annual management fees vary from state to state. And in some states they are unreasonably high, experts say. Over time, these higher fees can significantly reduce the benefits of compounding.
Most participants are unaware that they are not required to save in their owns state's plan -- but can shop around among other states for the best deal.
- Nineteen states offer stock investments for education savings and seven more are in the wings.
- The management fee in Iowa is 0.30 percent, 0.35 in Utah and 0.65 in New York.
- Arizona offers a government bond fund carrying a 1.4 percent fee -- five times what Vanguard charges its Treasury bond-fund customers -- and it charges 1.62 percent for its balanced fund.
- But in Maine and Indiana it is 1.6 percent, and 1.8 percent in Arkansas.
- Although the funds of both Colorado and West Virginia are managed by Citigroup's Salomon Smith Barney unit, which charges a 1 percent fee, Colorado levies as much as a 0.3 percent fee on top of that -- while West Virginia takes nothing.
On a $100,000 account, the Colorado surcharge costs a participant $300 a year compounded. If the eventual recipient is a toddler now, the Colorado plan could drain $10,000 in potential earnings from the fund come college time.
Source: Thomas Easton and Michael Maiello, "The College Savings Fund Scandal," Forbes, March 6, 2000.
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