Senator Peter Fitzgerald on Thursday called on Congress to "eliminate or sharply reduce" the layer of fees added onto 529 college savings plans by state governments because they undermine the tax advantage that product offers to investors.

He also urged Congress to simplify and improve fee disclosures, require 529 plans to provide at least the same disclosures that ordinary mutual funds are required to display, and encourage states to compete against one another and to discourage "protectionist measures" that chain state residents into "substandard" local plans.

"Congress should act to make sure that investors – not state bureaucrats, brokers or fund managers – capture the tax benefits from section 529 plans," Fitzgerald said while chairing a hearing of the Senate Governmental Affairs subcommittee on Financial Management, the Budget and International Security. "Right now, too many middlemen, including state bureaucrats, are feeding at the trough."

Fitzgerald, who is retiring from the Hill, noted that parents investing in their child’s education via high-fee 529 plans would have been better off investing in private, taxable funds in some cases. "Fees charged to mutual fund investors, when stated as a percentage of assets, sound de minimis and trivial. But small differences in fees add up to very large differences in investment returns over time," he said.

The warning from Fitzgerald comes as 529 plans are growing rapidly, with 6.8 million accounts and $54 billion in assets under management nationwide.

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