Why financial planners hate Utah

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(Money Magazine) -- Clients come to me with money in college savings plans from dozens of states, but I've never seen a single one who had invested in Utah's 529. Why is that? I assume it's because, unlike most states, Utah doesn't have an adviser-sold plan, so financial planners have no incentive to invest their clients' money in it.

If you buy a 529 from an adviser, you'll pay commissions in the form of a front-end load as high as 5.75% or a higher annual expense. Either way, these fees do nothing except lower your returns.

I've seen clients who got a double whammy: They missed out on a state tax deduction on their 529 contributions and ended up with an expensive, low-performing 529 or, even worse, a high-fee insurance policy.

Most of my son's college money is in the Utah 529 (800-418-2551 or uesp.org). I selected it because its rock-bottom costs (no more than 0.38% a year, plus a maximum annual account fee of $20) more than made up for the tax deduction I gave up from the more expensive plan in my own state.

The good news is that, according to the Utah plan, 20% of their new accounts are opened as a result of adviser recommendations. This tells you that there are a number of financial planners out there who aren't just looking to maximize their pay.

Personally, I believe that everyone should invest in a direct-sold 529 plan, which most states offer in addition to an adviser-sold plan. Here's how to find the right one:

Start with your home state. You can find information on tax deductions and fees for every state plan at collegesavings.org.

Consider costs. Even if you get a state tax break, you may save more over time by going with a lower-cost 529 in another state.

Say you invest $10,000 in a 529 and you can deduct your contribution on your state return. If your local tax rate is 5%, your net tax savings (after 28% federal taxes) is $373.44. In this example, if a plan charges 0.4% less than the one in your home state, the lower fees will eventually outweigh the tax savings in 10 years.

Select an age-based investing option. In an age-based fund, your stock and bond mix will automatically get more conservative as your child approaches college age.

And remember, any money you aren't using to pay your planner can go toward funding your child's education.

Worried about your investments? Get a makeover from Money Magazine. E-mail us at makeover@moneymail.com.