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529 Plans

College-Savings Plans Cut Fees

Savers benefit from lower expenses and more choices.

We can't assure you that Junior will get into Harvard when the time comes, or that any college he chooses won't cost you an arm and a leg. But the good news is that saving for college is getting less expensive as fees in state-sponsored 529 college-savings plans fall.

Named for a section of the Internal Revenue Code, 529 plans allow college savings to grow tax-free. Contributions get at least partial income-tax breaks in 34 states and Washington, D.C.

Fees for 529 plans are layered and complex. But they're headed lower, thanks to a competitive bidding process for plan managers and economies of scale as assets grow. Last year, Nebraska announced a new plan manager, slashed its program management fee from 0.60% of assets to 0.29%, and eliminated the annual account-maintenance fee of $20. Connecticut cut management fees by more than one-third, to 0.20% of assets. New York lowered total fees -- management fees plus underlying fund fees -- by almost half, from 0.49% to 0.25%. Fidelity, T. Rowe Price and Vanguard have all recently cut fees in 529s that they manage.

Some of the fee-cutting is designed to save face. The plans got a black eye in 2008, after the market plunge caught some families off guard. The typical 529 lost 24% in 2008, according to investment-research firm Morningstar. That wasn't as bad as the 37% drop in the S&P 500. Nonetheless, managers are rolling out more low-risk options. In September, Fidelity introduced a Bank Deposit Portfolio, insured by the Federal Deposit Insurance Corp., for plans it manages in five states.