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This is the season when students graduate from high school and their parents worry about paying for college. Many hope to benefit from a tax-free fund designed to save for college. It's called a 529 and over the past couple of decades Americans have put about $80 billion into them. Yet an investment researcher argues they have serious flaws. Greg Brown works for the independent company Morningstar and he's on the phone. Welcome to the program.

Mr. GREG BROWN (Mutual Fund Analyst): Thank you for having me.

INSKEEP: So what's wrong with a tax-free fund to pay for college?

Mr. BROWN: The problem with 529s is that they add a layer of complexity and confusion that really honestly doesn't need to be there. Every state has a 529 plan. So you've got an enormous amount of choice. Even if you were to, you know, decide on a state, you would actually have to choose among four or five different plans sometimes in those states.

INSKEEP: You mentioned the complexity of these 529s. You've got a state involved as well as some kind of investment firm. Do you end up paying two sets of fees?

Mr. BROWN: Yes. In fact, it's a very important distinction. So with states involved you're adding a layer of cost. There's no doubt about that. You've got the underlying fund fees and you've got additional costs that the state is adding to handle recordkeeping and other sorts of things. Some are as low as, you know, 10 basis points or 0.1 percent, but summer is high as 0.7 percent or 70 basis points.

INSKEEP: Which over a decade that can really add up, I imagine.

Mr. BROWN: That can certainly add up.

INSKEEP: So you've got a bunch of different varieties of funds. I imagine there are different levels of risk.

Mr. BROWN: There are different levels of risk. This year we've really paid attention to some of the age-based options.

INSKEEP: Age-based options. What does that mean?

Mr. BROWN: That means, you know, for a younger child you've got more in equities and less in cash and bonds. And that as your child ages, the portfolio becomes more conservative over time and ends up in more in cash and bonds as, you know, your child approaches college age.

INSKEEP: Well, that sounds good. If the kid isn't going to college for 15 years, I take more risks, but take fewer risks later. Is that not working?

Mr. BROWN: Yes, the concept is very, very robust. But the problem is that many plans had a good deal of equities as the beneficiary was approaching college age. So you had some plans that had 50 or even 60 percent in equities, you know, just prior to or even in college.

INSKEEP: Oh. I'm just thinking about what some parents must be discovering now as they get ready to pay for their kids going off to college this fall.

Mr. BROWN: That's right. And it's very dangerous because you've got, you have very limited time to actually make up those losses. And when your child actually goes to college, you know, you've only got a four-year drawdown period. So you've only got four years to use your assets and very limited time to recover.

INSKEEP: So does this mean it's a bad idea to get your get your money into a 529 if your kid is, say, eight now or 10?

Mr. BROWN: It's not a bad idea. I mean as it stands today, for parents that want to save a significant amount of money for college, 529s are the best way to save for college. We just think that there's better options that could be out there like the Coverdell Education Savings Account. It's very similar to a Roth IRA. You can actually go out and choose where you want to put your money, and so you can choose, you know, virtually any mutual fund out there. And so you just have a lot more control over your money, and there's no state involvement, so there's no confusion about the state being involved in the complexity.

And I really think, I mean target date retirement funds are wonderful ideas. And I think if Coverdells were given more support, then mutual fund companies would create these, you know, college-age-based options that would work in the Coverdell format, and investors can make these, you know, low maintenance easy-to-choose decisions. I mean they could choose these college-age-based options in the Coverdell format and use the expertise in the mutual fund company to set the allocation in the appropriate mix of stocks and bonds.

INSKEEP: Greg Brown of Morningstar, thanks very much.

Mr. BROWN: Okay, thank you.

INSKEEP: You can read his original report and see his list of the best and worst 529 plans by clicking on the links we've provided at npr.org.

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