Last week, during my research on Virginia’s Tuition Track Portfolio option, I discovered that Virginia’s advisor-sold 529 plan is twelve times the size of Virginia’s direct-sold 529 plan! Not only that, it’s the biggest 529 plan in the nation. And it’s not even close! It’s 2.4 times the size of the runner up, New York’s 529 College Savings plan.
Another fact? Almost one-fifth of all 529 funds across the country are held in Virginia’s CollegeAmerica plan.
And when you look at only advisor-sold 529s, CollegeAmerica is nearly as big as all other advisor-sold plans combined: $84 billion to $86 billion.
Wow! Mind blown.
Let’s go down the rabbit hole and take a look at how an advisor-sold plan differs from a direct-sold plan.
Let me say first that I have zero personal experience with financial advisors. I haven’t been able to talk myself into it yet. In fact, color me skeptical of financial advisors. With obfuscated fees and advisor fallibility, I suspect that many might be better off self-servicing with index fund options in direct-sold 529s.
That said, I suspect the number one reason why people choose the advisor-sold 529 options is because they don’t want to bother thinking about it. They’d rather just accept whatever their advisor suggests/does and move on. Frankly, I can understand the appeal. And as long as markets are doing well and all ships rise, they’ll probably never even care.
In addition, by having all of their investment accounts with a single financial advisor, they only have one place where they need to check on their investments. If you don’t enjoy dealing with finances, or perhaps you’re driven by fear that you’ll make a mistake, having it all in a one stop shop can be appealing.
Access to More Investment Options
Investing money in an advisor-sold 529 plan can give you a wider variety of investment options. As an example, Virginia’s direct-sold plan has 22 different options, including six target date funds. The available options include both index funds and actively managed funds. Meanwhile, the advisor-sold plan has 46 options, including seven target date funds. No index funds to be seen. Most are actively managed funds offered through the Capital Group. More options, but in my opinion they aren’t better because of their higher fees.
Looking through the prospectus for the CollegeAmerica plan, we see that there are multiple share classes. From what I could tell, the typical investor has access to either 529-A or 529-C shares. The A-shares have a maximum sales load of 3.5%. C-shares have no sales load (as long as you hold longer than 12 months!) but higher annual fees than A-shares do. After five years, C-shares get converted into A-shares. Essentially, you’re choosing between paying the investment expense up front or spread out over 5 years. In both cases, the advisor gets a 1% kickback when you buy shares.
On the silver-lining side of the equation, the sales load with A-shares goes down the more money you have invested in funds managed by the Capital Group, including investments outside of your 529 account. If you own their funds in other accounts, such as your 401(k) or IRA, you could end up paying a smaller sales load than you would otherwise. But if your total investment is less than $250k, you’ll be paying a 3.5% sales load. If you have more than that, you’ll pay a smaller sales load, but probably not less than 1.5%.
Annual Asset-Based Fees
Let’s take a look at one of the investment options: GFA or The Growth Fund of America.
Huh. Where have I seen that fund before? Oh yeah, that’s right! I saw it a couple months ago when doing an investment analysis of AGTHX. This is pretty much the same thing, wrapped in 529-form.
Don’t worry. I’m not going to rehash the same analysis and conclusions. I’ll keep it simple. GFA has a base annual expense of .67% for A-shares, and a higher 1.44% expense ratio for C-shares. Assuming a 5% annually compounded investment of $10k in A-shares, you’d have $14,744 after 10 years. And in C-shares, you’d have $14,723, slightly less. That’s about 9.5% less than what you’d have with no fees, or $16,289.
This graph shows the total investment expense over ten years:
There are pros and cons with using an advisor-sold 529 plan. For me, the disadvantages of sales loads, higher fees, and missing index fund options, outweigh the advantages of simplicity and increased options.
In some ways, this post raises almost as many questions as it answers. For starters, why is Virginia’s advisor-sold 529 so huge? Why is the Virginia advisor-sold plan so successful compared to other advisor-sold plans? Could it be because hugely populous states like California (#1), Texas (#2) and Florida (#3) don’t offer any tax benefits for investing in their own state’s plans, so financial advisors shuffle investors to Virginia’s plan (#12 in population)? Could this also be the same reason why Main’s advisor-sold plan is in second place, even though it’s 42nd in population size? All interesting questions.
I hope you enjoyed my trip down the advisor-sold 529 plan hole. Leave me a comment!