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Thursday, April 28, 2011

You'd be better off putting cash in a mattress

The Oregon college savings plan has had its issues -- here's the latest. Money market funds with high fees are a real losing proposition these days -- even if one ignores the inflation monster that's right around the corner.

UPDATE, 8:33 p.m.: O.k., it's an overstatement. You won't get a state tax deduction for stuffing Benjamins into a mattress.

Comments (7)

When large public fund companies start up a new fund, they often waive costs for a while until they can get the costs down to a reasonable level so this sort of thing doesn't happen.

And some fund companies (Vanguard come to mind) always operate their money market funds at cost as an enticement for investors to keep their money under their umbrella. It's probably a good business decision on their part.

In both cases, they know that it's just part of doing business - jack up the fees, and investors will flee.

It seems that none of this applies when there's a captive audience involved or they think that no one is looking.

Hey, somebody has to pay for those golf junkets.

Irony is that TIAA-CREF is probably the most responsible and ethical in the business.

All the 529 plans are old-fashioned, inflexible, high fee/high load rip offs. It's about time plans were reformed to give college savers freedom to invest in a broad range of securities through on-line low commission, no-fee brokerages.

With current limited, costly investment options, I would advise savvy investors to eschew the tax advantages of 529's in favor of managing their kid's college fund for maximum return in a taxable brokerage account.

The 15-17 year old portfolio returned 5.5%, and the 18+ portfolio returned 2.8%. Not bad for conservative investments in today's interest rate environment. The fees in the OCSP are more than offset by the tax advantages, and the returns you get are consistent with the market. There are plenty of investment options from risky to conservative -- you'd be a fool to not take advantage of the tax break, and would lose in the long run.

The idea of a "fee waiver" for those in the money market fund is a bad one. It's not like those costs go away, they just get transferred to other investors in the fund who have taken on more risk and, at least in the last two years, have been handsomely rewarded. If you don't like the low (or negative) returns of the money market, move your money to something else, like the principal plus interest portfolio.

I was disappointed when they took the Vanguard fund options out of the Oregon College Savings Plan. Or maybe it was they (the oversight board, not Vanguard) jacked up the fees for investors who wanted to use them. I can't remember for sure now which is the case, only that they were no longer attractive options for us so we gritted our teeth and accepted the TIAA-CREF funds when they took on the Plan. If Oregon really cared about the best deal for Oregon parents saving for college, they would have kept the Vanguard funds as viable options or even selected Vanguard to be the fund administrator (Vanguard did bid to take on the Plan, I believe). As Newleaf says, TIAA-CREF (a nonprofit) does have a good reputation, and returns have been generally decent, but I suspect selecting them and not Vanguard and eliminating/jacking up the fees for the Vanguard funds was more about the oversight board making sure they got a good cut of investors' money.

We probably could use a better (new?) advisory board. Bad negotiators. (unless it lined their pockets)

There are plenty of investment options from risky to conservative -- you'd be a fool to not take advantage of the tax break, and would lose in the long run.

With young kids, a savvy investor would construct a portfolio that is way overweight commodities and has a very healthy allocation of developing country equities -- you can't get that kind of portfolio from what the 529 plans offer. And a savvy investor will buy and sell along the way -- for example, getting out of equities (in a graduated way) during 2008 and popping back in (in a graduated way) in 2009. I've been able to more than triple what these 529 plans earn, and have gotten a hell of a lot further along towards funding the college education of my three young kids (all the way if they go to state schools) than if I had taken the tax avoidance route.

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