iShares 529 Plan Review: Save for College with ETFs

I have heard some time ago that exchange-traded funds (ETFs) will be available in 401(k) retirement accounts. Not sure whether plan participants can trade ETFs in their accounts already, but in general I think it’s a good news not only because it will gives investors more choices to save for their retirement, but also ETFs are usually cheaper than their mutual fund counterparts (most ETFs are passive, index-based funds, so the cost for managing the fund is low) that are the only choice for most plans. The down side of having ETFs available in retirement accounts is that, since you can trade ETFs at any time during market hours, it may encourage excessive trading in the accounts. In the long term that will hurt investors because trading ETFs involves commissions that are added to the overall cost. If I take payroll deductions and invest the money in ETFs every two weeks, then the costs would be too high. In that case, using ETFs to save for retirement doesn’t seem to be a good idea. If I can control the investment frequency, then I may consider trying it.

Then how about using ETFs in college savings plans such as 529 plans?

Since I can control how often and how much to make a contribution in a 529 plan, the total trading cost can be reduced (trade less with a larger amount each time). So maybe it won’t be a bad choice.

I recently noticed that Barclays Capital, the creator of iShares ETFs, has teamed up with UPromise to offer iShares 529 Plan, a college savings plan that invests in nothing but iShares ETFs. Currently, the plan uses the following iShares ETFs to build its 20 investment portfolios (PDF file):

  • iShares Russell 1000 Index Fund
  • iShares Russell 2000 Index Fund
  • iShares MSCI EAFE Index Fund
  • iShares MSCI Emerging Markets Index Fund
  • iShares Cohen & Steers Realty Majors Index Fund
  • iShares Lehman Aggregate Bond Fund
  • iShares Lehman TIPS Bond Fund
  • iShares Lehman 20+ Year Treasury Bond Fund
  • iShares Lehman Short Treasury Bond Fund
  • BGI Institutional Money Market Fund

Some of the portfolios are age based, with target year from 2009 to 2024, some are investment style based, such as aggressive, moderate, and conservative.

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Of course, when choosing a 529 plan, the number one thing comes to my mind is the cost. How much do the investments cost? Is there any administrative fee? Any sale load? As far as the cost is concerned, the iShares 529 Plan seems to be quite competitive. For all of its 20 portfolios, the annual asset based fees range from 0.50% to 1.1%, with most of them in the middle of 0.60% (still higher than the Ohio CollegeAdvantage plan that I am using). In addition, the plan also charges $10 annual account maintenance fee.

While the plan seems to be nice, there’s one catch: the plan is only available through a financial advisor, even though the advisor doesn’t earn any commission.

From what I was told when I called them, the reason for having to go through an advisor is that since the plan invests in ETFs, which may be new to some people, the advisor is to help plan participants understand the product. And the advisor only signs the forms. That’s all they do, they don’t earn any commission or collect any fee. In addition, the CSR on the phone also said the $10 fee will be waived if the account has more than $20,000 in assets.

Will you be interested in this plan if you already have an advisor? Or you’d rather stay will traditional low-cost investment such as mutual funds?

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