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Conflicting Incentives in the Management of 529 Plans

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431

Abstract

College savings plans operating under Section 529 of the Internal Revenue Code are tax-advantaged investment plans growing in popularity with US households. These plans are sponsored by state governments and are exempt from important investor protection laws such as the Investment Company Act of 1940. Section 529 plans charge investors administrative fees—collected by sponsoring states, program managers, and other intermediaries—that are several times higher than those of 401(k) plans. We study how the incentives of these key players relate to plan characteristics. Plans offered by state governments that were under budgetary pressure around contract negotiations offer menus with higher fees, weaker performance, and no offsetting benefits. Our explanation is that when states are under budgetary pressure, they succumb to contract terms proposed by program managers that offer states higher fee revenues in exchange for greater latitude for program managers to pursue their own interests.

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