The nadir of the economic downturn ravaged many American families’ college savings accounts, sending balances down almost 50%, according to Deborah Fox, the founder of Fox College Funding.

It frustrated investors, but it also prompted some to become more educated about the fees associated with 529 plans.

“It’s always been a touchy area, but especially so now in a stock market environment that is sideways at best,” said Fox, founder of San Diego-based Fox College Funding, which works with parents of high-school aged students to assemble higher education savings plans.

Now that the stock market has started to recover and account balances have also rebounded, 529 plan managers are reducing fees to retain clients. Baltimore-based T. Rowe Price has lowered two major fees in the college savings plan it manages for the Education Trust of Alaska. The company announced Monday it cut the program fee by nearly a third, to 20 basis points, and the annual account fee 20% to $20.

“There have been quite a few plans that have announced fee reductions,” said Tom Kazmierczak,  a senior product manager for 529 college savings at T. Rowe Price. “We’re in the current wave that is occurring now.”

Industry sources agree that T. Rowe Price’s move is the latest in a competitive round of fee reductions. Since December, several states and mutual fund companies have lowered internal fees on 529 plans, including Arizona, Arkansas, California, Colorado, Iowa, Kentucky, Massachusetts, Minnesota, Nevada, New Hampshire, New York and Vermont, Fox said. Between Nov. 1 and Dec. 1, plan managers lowered total 529 fees to 1.17% from 1.19% on advisor-sold plans and to 0.69% from 0.71% on direct-sold plans, according to Boston-based Financial Research Corp.

“This move is a sign of the times,” Fox said, adding that plan managers like T. Rowe Price are using the fee reductions to get consumers to use the plans to save for their children’s educations. It hasn’t been easy. The College Savings Foundation, a Washington-based industry group said gross sales into plans managed by its members totaled $1.2 billion at the end of 2008, a 52% drop from a year earlier.

“The biggest complaint they’ve had regarding the 529 plans is the [extra] layer of fees that the clients pay,” Fox said.

Mutual fund companies like T. Rowe Price typically partner with states to offer 529 savings plans to investors, and pay the states a fee to offer that plan to consumers. Investors in the T. Rowe Price Sec 529 plan, for instance, can choose to invest in the Total Equity Market Index Portfolio with a fee of 68 basis points. An identical T. Rowe Price Fund outside the 529 plan would cost just 40 basis points, a difference of 28 basis points, according to Mary McGrath, an executive vice president and portfolio manager at Cozad Asset Management in Champaign, Ill. 

“Over the years we’ve seen states jettisoning one mutual fund company for another based on the fees they charge,” Fox said.

Kazmierczak said that T. Rowe Price, however, successfully rebid its contract with Alaska, locking in its partnership with that state until 2024.

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