Many 529 plans are marketed by dealers, while others are sold directly by the state. Learn more about considerations for investing in 529 plans.
Investing Directly with the State Plan
Some states permit or even require investors seeking to participate in their 529 plans to purchase shares directly through state personnel without any assistance of a dealer. These transactions may be limited either to purchases made by residents of that state or to investments in selected portfolios offered through the plan. MSRB rules do not apply to sales by state personnel, though they may apply to other investment professionals who assist the state in structuring, administering or distributing the plan.
Investing through a Dealer
An investment management firm, referred to as the plan manager or plan administrator, is engaged by the state to manage the investment of plan assets. The primary distributor, often a dealer-affiliate of the investment management firm, underwrites and distributes units of the 529 plan. In order to provide for greater distribution channels to investors, the primary distributor usually enters into an arrangement with other dealers that act as the selling dealer.
More specifically, these broad distribution networks of selling dealers and banks assist the primary distributor in marketing the plans. A selling dealer may be a member of one or several distribution networks and therefore may market several different states’ 529 plans. However, a selling dealer typically will not be able to offer every state's plans to its customers.
Furthermore, customers are not limited to investing in the 529 plan in their state or the state in which the designated beneficiary will attend school. However, certain state tax and other benefits may only be available for residents of that state. If a customer wishes to invest in a 529 plan not offered by a particular dealer, the customer will need to directly contact the plan administrator or a dealer that is authorized to market that plan. Dealers must conduct their sales and marketing activities in compliance with MSRB rules. These rules establish important standards of fair practice, disclosure, suitability and professional qualification for dealers.
As an investor, understanding these rules may explain why your dealer is requesting certain information and the importance of the disclosure documents that are provided.
Commissions and Other Fees and Charges
There are certain fees and charges assessed under a 529 plan that you may pay directly and indirectly. The fees and charges assessed under a 529 plan will vary, in part, based on the investment option selected and the underlying mutual fund associated with that option. For example, an investment option may have Class A, Class B, or Class C shares with each class having different fees and expenses. Class A shares may require investors to pay a fee upfront, called a front-end sales load, which would reduce the investor’s contribution into the savings plan. Class B shares do not require investors to pay a fee upfront, but often have a contingent deferred sales charge (also known as a back-end load) that may be assessed on certain withdrawals. Class B shares can have higher annual distribution fees and expenses than Class A shares. Class C shares also may have a higher annual asset-based charge and other expenses than Class A shares, but an initial sales charge will not be assessed. As with the purchase of a mutual fund, fees and charges may affect the total return on an investment in a 529 plan.
Further, the investment management firm typically will charge a fee based on the assets under management. Other charges, including but not limited to any upfront sales loads charged by dealers underwriting the plans or annual account maintenance or miscellaneous fees charged by states or agencies (i.e., plan sponsor), will be payable directly by the investor. Fees and charges may be lower in a direct-sold plan, but an investor may not have access to the advice of an investment professional, as with a dealer-sold plan (also known as advisor-sold plans).
Selection of Investments
Each 529 plan may provide a range of investment options, which may vary greatly from state to state. Federal tax law generally permits the account owner to select from among certain investment options for a specific account only when the account is initially opened. An account owner may change investment options no more frequently than twice per calendar year, and when making certain changes to the designated beneficiary of the account. Consult with a qualified professional regarding the possible tax and legal consequences of changing the designated beneficiary of the account.