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529 Plans

Not-So-Simple College Savings

529 employer benefits can cost more if you don't ask the right questions.

It sounds like a great perk. You invest in a college-savings plan selected by your employer, and contributions are automatically deducted from your paycheck. Result: a no-sweat college kitty. Unfortunately, it' not that simple.

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More than 10,000 employers offer enrollment in 529 plans as a benefit to their employees. Generally, these state-sponsored plans are a good deal. They provide shelter from federal taxes while minimizing the damage to your chances for college financial aid. In more than half of the states, you also get a state income-tax deduction or other tax breaks in exchange for your contributions.

When you invest on your own in a state 529 plan, you can usually choose between a direct-sold plan and a plan that you can purchase only through an adviser or broker. Direct-sold plans offer an adequate selection of investments, plus their expenses are lower, so more of your money goes toward savings instead of fees.

But many 529s offered through employers are broker-sold plans, which carry higher costs. For example, a worker who invests in a Putnam CollegeAdvantage 529 will pay a sales load of up to 5.75%, if an employer doesn't qualify for a fee waiver, on top of 1.50% annually for the plan's most aggressive portfolio. An Ohio resident who invests directly in the state's CollegeAdvantage 529, however, pays no sales charge and only 0.92% annually for a nearly identical portfolio from Putnam.

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Same deal with 529s run by AllianceBernstein, whose Rhode Island-sponsored plan is offered as a benefit by more than 4,500 employers. If Rhode Island residents invest in the 529 at the workplace, they may pay a 0.25% annual distribution fee. On the other hand, there’s no distribution fee if they invest directly in the state's plan, which has a similar menu of Alliance funds that come with no distribution fee.

Out-of-state investors who put their college money in the Rhode Island plan at the workplace may pay a 4.25% sales load. Although most Alliance workplace plans don't carry sales charges, employees who invest in a 529 plan that's not sponsored by their home state may lose valuable tax benefits.

The main advantage of investing in an on-the-job 529 plan is the convenience of payroll deduction. But if you're looking for convenience, nearly all 529 plans let you set up automatic monthly contributions from a bank account. Check the tax benefits of your state's direct-sold plan before you look elsewhere, even if it's in your office.

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