College is becoming increasingly expensive and the need for college savings is becoming critical if you don’t want to have a large amount of student debt for your children. But, the task of deciding what to do for college savings can be daunting with so many different options. Many choose to work with a financial professional to help guide them to the best decision. But, are these recommendations always in your best interest? Sadly, many times they are not and are merely suitable for you. This is because more than likely, you are working with a “broker”, who is paid a commission, and this commission gives them an incentive to use one product over another.

So let’s provide a little backstory on how 529 plans work before diving deeper into the conversation. A 529 plan is imply an account used for college education. Money goes in, is invested, is tax deferred, and as long as the funds are used for qualified education expenses, the withdrawals are tax free. If the withdrawals are not used for these expenses, they are subject to taxation and have a 10% penalty. You can get around this though if your child receives a full scholarship or doesn’t go to college by transferring the account to another child or relative.

Now that the basics are taken care of, let’s talk about where 529 plans get fuzzy. Every state sponsors their own 529 plan, but the tricky part is, you do not have to use your state’s plan. You are allowed to use any state plan that you wish. So, some investors will hunt for the state plan with the best performance, lowest cost, or best investment options. The part that is unrealized though, is that if you use another state’s plan, you can’t receive a state income tax deduction. In Michigan, for instance, you can deduct up to $10,000 of 529 contributions each year against your state income taxes. Our state tax is 4.25%, so that means you can save $425 a year for your contributions.

That all sounds good and understandable, so where does the “simply suitable” recommendation come into play? Let’s take the Michigan plan as an example again. Michigan’s 529 plan is called the MESP (Michigan Education Savings Plan). But, chances are if you’re a Michigan resident, you do not use this plan unless you work with a fiduciary advisor or set it up yourself. This is because many “brokers” advise Michigan residents to use an out of state plan rather than the MESP. Why would the do something like that? Is it because the MESP doesn’t have good performance? No. Is it because the MESP has high investment costs? No. Is it because the MESP doesn’t allow tax deductions for contributions for Michigan residents? No. So, why in the world would a financial professional recommend an out of state plan, such as the CollegeAmerica 529 Plan ran by American Funds, which is sponsored by the state of Virginia? The dirty and simple answer is that the broker gets paid more on recommending the Virginia plan versus the MESP, which doesn’t pay the advisor. It’s not that the Virginia plan offers superior performance, lower cost funds, or better investment options. In fact, you’d be hard pressed to find a better plan than the MESP. Virginia happens to have the largest 529 plan in America because they pay the professionals who recommend it a healthy amount of money. In return, the investors, like the ones in Michigan, lose out on tax deductions year after year and are invested in something that is not in their best interests.

So, what do these payments look like? Let’s use another example. When we have a previous Edward Jones client in our office, we can tell them where their 529 plan is invested before they even show us a statement. Almost always, they are invested in the American Funds Virginia plan. This is because if we look at the Edward Jones revenue sharing disclosure, we can see that Edward Jones was paid millions of dollars by American Funds to “push” clients to American Funds. Whenever there is a financial incentive to use one product over another, there arises an opportunity for the advisor or sales person to not work in your best interest.

So, what’s the take away from this article? Make sure your 529 plan has your best interests at heart and if you choose to work with a professional, make sure you are working with a fiduciary advisor and not a broker when choosing a 529 plan. How can you tell a fiduciary advisor from a broker? A fiduciary advisor only is paid by fees and doesn’t accept commissions. They have their Series 66 or series 63 and 65 licenses and work for a Registered Investment Advisor (RIA). Brokers often have their Series 7 and or insurance licenses and often work as a “Registered Representative”. Simply ask your advisor if he or she is a fiduciary.