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SEC to Examine Fees of College Savings Plans

March 17, 2004|From Bloomberg News

Parents who invest in state-run, tax-deferred college savings plans may pay as much in fees as they receive in tax benefits, the Securities and Exchange Commission said in a letter made public Tuesday.

SEC Chairman William H. Donaldson said he had set up a task force to examine the so-called 529 plans, which are offered by states and invest in mutual funds such as those sold by Vanguard Group, Fidelity Investments and other companies.

"The current state of affairs with respect to 529 plans is complicated and likely difficult for parents to understand," Donaldson said in a letter to Rep. Michael G. Oxley (R-Ohio), who asked about reports of high fees charged by the plans.

Created by Congress in 1990 to help people save for college or graduate school, 529 plans number about 4.2 million with $35 billion invested, the National Assn. of State Treasurers said.

In a report accompanying Donaldson's letter, the SEC said fees in some state plans may negate the tax benefits, especially when compared with buying shares in a taxable, low-cost mutual fund.

The SEC said it had limited information about 529 plans because their offers and sales were not regulated under federal securities law, except for anti-fraud provisions that apply to brokers and municipal securities dealers.

Investors also may get less information than they would about their own mutual funds because the investors aren't considered owners of the funds in which the plans invest, the SEC said.

For that reason, "federal securities laws do not require delivery of disclosure documents such as annual reports, semi-annual reports and proxy statements," the SEC said.

The SEC said fees and disclosures varied from state to state and among plans. Under federal law, earnings from 529 plans are tax-deferred and withdrawals are tax-exempt if used for higher education.

John Heywood, principal for the Vanguard Education Markets Group, said Vanguard always tried to make disclosures about plans clear whether it acted as investment manager or as marketer.

"The total expenses associated with the plan are clearly and prominently disclosed," Heywood said. He said fees on Vanguard's 529 plans were lower than fees commonly charged to mutual fund investors.

Chris Wloszczyna, a spokesman for the Investment Company Institute, a mutual fund industry trade group, declined to comment on the SEC report. A spokesman for Fidelity didn't return calls seeking comment.

Oxley, chairman of the House Financial Services Committee, said he probably would call hearings on regulation of 529 plans because they related to "perhaps one of the most important decisions a parent has to make -- that is, creating enough capital for their kids" to go to college.

"There is an opportunity, I think, for Congress, the SEC and the states to work in a cooperative way to make certain those people who have entrusted the state with their money for a period of time have the confidence of knowing it's being well taken care of," Oxley said at a conference of state attorneys general Tuesday in Washington.

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