Why a bigger 529 plan isn’t necessarily better


It might be tempting to think bigger is better when it comes to saving for a child’s future education expenses, but money expert Clark Howard has a warning for you!

It turns out, the nation’s biggest 529 savings plan by assets is often sold by investment brokerages with high commissions attached to the financial product.

So, how you buy a state 529 plan is often just as important as which plan you actually pick.

RELATED: 529 plan guide: Here are the best places to invest your education savings

529 plans with more assets aren’t always better

If you’re unfamiliar, a 529 plan is a tax-free savings plan that is one of the best ways to save for your child’s education. And, thanks to changes in the tax code, money in a 529 can now be used to pay for tuition at private schools for kindergarten through twelfth grade, as well as for college.

With a 529 plan, the money grows tax-free and is spent tax-free for eligible expenses like tuition, books and other fees associated with education.

Why does plan size matter?

A new report published in The Philadelphia Inquirer notes that Virginia has the nation’s largest 529 plan. At last check, the Virginia Invest529 has nearly $65 billion in investable assets.

By way of comparison, the nation’s second-biggest plan — New York’s College Savings Program Direct Plan — is less than half the size, with just $24 billion assets under management, according to CNBC.

An important thing to know about 529 plans is that you don’t have to invest in your own state’s plan, though you may receive certain state tax benefits as in-state resident participant.

All things considered, though, the massive size of Virginia’s plan might leave you thinking that’s where the “smart money” goes — Virginia must have so many assets under management because it offers the best deal in the country.


But that’s not necessarily true, as the Philadelphia Inquirer points out:

“Virginia, with the biggest 529 plan, is also one of a few states whose plans are widely sold by investment brokerage offices. The fact those plans have attracted tens of billions more than other plans, because more people are out there selling them and collecting commissions, looks like confirmation of the old broker’s motto: ‘Financial products are not bought, they are sold.'”

Why you only want to buy direct-sold 529 products 

The 529 industry is like the larger investing industry. It’s possible to invest for zero cost on the one hand or to pay big bucks to invest on the other. The choice is yours.

Likewise, just as the investment field has seen tremendous price cuts, so too has the 529 industry during the past couple of years. That’s thanks largely to two factors, according to Clark Howard.

“As far as what’s driving all the cost-cutting across the industry, the direct-sold plans overall have lower costs than in the past for two reasons,” the money expert writes in his 529 plan guide.

“As plans have gotten so much bigger, the cost of serving each future college student has gone down. In addition, strong competition among direct-sold commission-free plans has been intense.”

Vanguard has an interactive map that lets you pull up and compare any state’s plan against their default plan, the Vanguard 529 Plan sponsored by Nevada (which made Clark’s Dean’s List cut, by the way):

Vanguard 529 plan map

When you compare the nation’s most popular plan — Virginia’s — to Nevada’s, the numbers show why you get a better deal in the latter plan.

As you can see, you’ll pay 15 basis points (0.15%) for the Vanguard 529 plan (Nevada) for “age-based” options. The “age-based” part simply means the plan will automatically adjust your mix of stocks and bonds as your child ages. Yet you’ll pay 20 to 69 basis points (0.20%-0.69%) for the Virginia Invest529 Plan.

Of course, the Virginia plan does have a lower entry point of just $25 to open an account vs. $3,000 in Nevada, so that’s something to take into account. In fact, it may tip the scales in favor of Virginia if you want to get started with a small amount of money.

Which states offer the best 529 plans?

The good news is you don’t have to face picking a 529 plan on your own!


Each year, Clark Howard goes through all the 529 plans across the country. His goal is to identify his favorite ones — typically the ones that have the lowest fees.

Among those plans that get the top honors this year — a distinction he calls the “Dean’s List” of plans — are the following:

  • Fidelity Arizona College Savings Plan
  • The ScholarShare College Savings Plan (California)
  • Delaware College Investment Plan
  • Bright Start (Illinois)
  • Massachusetts
  • U.Fund College Investing Plan
  • Michigan Education Savings Program
  • Vanguard 529 College Savings Plan (Nevada)
  • The UNIQUE College Investing Plan (New Hampshire)
  • The Education Plan Index (New Mexico)
  • New York’s College Savings Program
  • Ohio College Advantage 529 Savings Plan
  • my529 (Utah)

You can see Clark’s full list of preferred low-cost 529 plans here.

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