Saving for college in the state of Nevada just got a little cheaper.
The Silver State's 529 college savings program has slashed annual fees on six of its 17 investment portfolios sold directly to investors through Vanguard.
Effective last week, the Vanguard 529 College Savings Plan lowered the expense ratios for six portfolios that were sporting some of the highest fees in the plan. Annual fees now range from 0.65% to 0.67% of total assets compared to the previous 0.72% to 0.77% range. The move brings fees more in line with the rest of Vanguard's 529 choices sponsored by other states as well as rival provider TIAA-CREF.
The new expense ratios reflect Vanguard's "commitment to deliver well-managed college savings investments at the lowest reasonable cost to investors," said John Heywood, a principal in Vanguard's education markets group, in a prepared statement. An overwhelming majority of Nevada's plan participants live out-of-state largely due to the fact that it doesn't offer tax breaks to residents who invest in the plan since it doesn't have a state income tax.
When compounded over time, a few basis points in lowered expenses can result in significant savings. An investor who contributes $10,000 to the Vanguard Small-Cap Index Fund, assuming a 5% annual rate of return, would see that investment grow to $23,308 after 20 years. That represents savings of 16%, the company said. "That's enough to pay for a semester's worth of books," a Vanguard spokesman said.
After penetrating the 529 market just two years ago, Vanguard has become a dominant player in terms of market share. Assets in the Vanguard 529 plan in Nevada have ballooned to more than $650 million since its inception in 2002, the company said. Overall, the Valley Forge, Pa.-based fund company manages $6 billion in 529 assets, offering investment options in 10 states including New York and Utah.
"The industry is reaching a point where, in certain instances, those economies of scale are going to be passed along," said Whitney Dow, director of educational savings research at Financial Research Corp. of Boston. "It is part of a larger trend that expenses will be going down as the industry gains more critical mass, a trend that we expect to continue," he said. As the industry matures, Dow expects in many instances the portion of revenue that goes to state agencies will be rebated back to investors, helping move overall expenses downward.
Being of the indexing ilk, Vanguard has an easier time passing along those savings to investors, whereas actively managed portfolios can run expense ratios as high as 90 to 110 basis points and up to 150 basis points for adviser-sold portfolios. Vanguard also has greater flexibility when it comes to pricing because it is a mutually owned firm and has raised a substantial number of assets.
Cost Conscious
Vanguard's decision to cut fees comes amid a lot of noise on Capitol Hill over the extra layer of fees imposed on 529 plan participants not found in traditional mutual funds.
Sen. Peter Fitzgerald (R-Ill.) has criticized the state-sponsored programs for undermining the tax benefits those investments offer parents for their children through hefty fees and lack of adequate disclosure. "Right now, too many middlemen, including state bureaucrats, are feeding at the trough," Fitzgerald said while chairing a recent Senate subcommittee hearing.
"There's a lot of sensitivity to fees right now." said Joe Hurley, CEO and founder of SavingforCollege.com of Pittsford, N.Y., citing a confluence of factors that include Congressional involvement, competition in the marketplace and states' efforts to negotiate more favorable contracts with outside providers. The Securities and Exchange Commission and the National Association of Securities Dealers are investigating 529 plans to determine if the $54 billion industry is plagued with similar problems seen in the mutual fund industry.
While pressure from Washington has certainly become a concern for many 529 providers, it is not likely the catalyst driving Vanguard's decision to cut fees. "They still have the Vanguard International Stock Index Fund charging 86 basis points, so if they were looking to bring all their costs down, then they would have done something there also," said Morningstar senior analyst Dan McNeela.
McNeela noted that low account balances made it difficult for Vanguard to offer its absolute lowest prices right from the start. His expectation is that as these plans continue to gain assets, Vanguard will continue to push down fees, using economies of scale to give investors a better deal. The fee reductions are happening more frequently in the direct-sold 529 business because they're the ones where investors are likely to need more help from the states. "The model for the direct-sold business is really shifting toward passively managed, low-cost programs," Hurley said.
Aside from the fee cuts, Vanguard has also launched a series of new Web-based tools to help investors understand the nuances of 529 plans and determine which investment choice will best suit their needs. Its 529 Comparison Tool enables investors to compare programs that feature Vanguard funds with other state-sponsored programs. The site also offers a calculator that helps determine whether converting a UGMA/UTMA account into a 529 plan makes sense.
