Section 529 college savings plans are tax-favored investment vehicles, which saw tremendous growth after the Economic Growth and Tax Relief Reconciliation Act of 2001 expanded 529 plan benefits to include tax-free distributions for qualified higher education expenses. However, regulators, the press, and fund advisors criticized the Section 529 college savings plan industry for inadequate and nonuniform disclosures of investor information, such as historical returns, fees, taxes, and underlying investments. We investigate consumers’ investment choices after a disclosure regime change in 2003 and find that after enhanced disclosures became widely available, investors selected fewer plans offered exclusively through brokers, increasingly chose portfolios based on past investment performance, but remained unresponsive to state tax benefit disclosures. We also analyze the plans’ performance and find evidence that 529 investors are constrained to invest in portfolios with high, return-eroding fees. Nearly 20 percent of the portfolios have a statistically significant negative alpha, the measure of risk-adjusted excess return, while less than 1 percent have a statistically significant positive alpha.
We thank Financial Research Corporation for providing select §529 plan data and Morningstar for providing §529 historical performance data. This work has benefited from the helpful comments by Chris Anderson, Gerald Auten, Audra Boone, Bill Fox, Phillip Daves, Chris Hunter, Kevin Moore, and workshop participants at the National Tax Association Annual Meeting, the University of Kansas, the Oklahoma State University Accounting Research Conference, Texas Tech University, the Central States Accounting Conference, and the University of Texas at Austin. We appreciate research assistance from Brad Kiser and Randy Gustafson. This paper was accepted by Toby Stock.
Meyer Alexander, R., Luna, L. and Gill, S. (2015), "Does College Savings Plan Performance Matter?", Advances in Taxation (Advances in Taxation, Vol. 22), Emerald Group Publishing Limited, pp. 75-108. https://doi.org/10.1108/S1058-749720150000022002Download as .RIS
Emerald Group Publishing Limited
Copyright © 2015 Emerald Group Publishing Limited