Household Investment in 529 College Savings Plans and Information Processing Frictions

James J. Li and Christina Zhu are in the Accounting Department, and Olivia S. Mitchell in the Business Economics/Policy Department, at the Wharton School of the University of Pennsylvania.

In the United States, 529 plans are tax-advantaged savings plans designed to encourage individuals to save for their beneficiaries’ future education costs. According to the College Savings Plan Network, 529 plans reached $480 billion in assets in 2021. Given the economic importance of this substantial asset base, our new paper asks whether households make good investment decisions when it comes to 529 plans. 

The Key Takeaway

Somewhat to our surprise, we found that 60% of 529 plan assets are allocated suboptimally across plans; that is, people selected plans that did not earn the best risk-adjusted returns that they could have earned. This misallocation has important consequences for household educational savings outcomes. In particular, we estimate that households could earn 9% more on the money they saved, over the account’s lifetime, if they had instead selected their optimal plan.

An Example

As an example, suppose two investors, one residing in California and the other in Oklahoma, wanted to invest in the TIAA-CREF Equity Index Fund (TIEIX) and use the future value of this investment for their children’s college expenses. If both invested outside a 529 plan, they would open a brokerage account, purchase the desired amount of funds, and let the investment grow (hopefully). Ultimately, both own the same product – shares of TIEIX – and so they will experience the same rewards.

Now suppose these two investors wanted to invest in the same fund inside a 529 plan, to take advantage of the IRS tax benefits granted to the plan. The California resident opens an account under California’s ScholarShare 529 Plan, and the Oklahoma resident opens an account under Oklahoma’s College Savings Plan. Both plans include TIEIX, but California’s plan charges an additional 0.01% plan manager fee (total fees of 0.06%), while Oklahoma’s plan has an additional 0.20% plan manager fee (total fees of 0.25%). Now, the two investors do not own the same product, as fees differ by plan, so they will not experience the same rewards. For the same initial saving amount, buyers of the Oklahoma plan could end up with 5.8% less in return than the California plan buyer. The difference is also affected by the fact that states offer distinct tax benefits for 529 plan contributions. California does not grant a tax deduction for 529 plan contributions, while Oklahoma does. If these tax benefits are reinvested into the plan, our two investors will now experience additional differences in outcomes due to the different tax treatment of the contributions (in this example, an Oklahoma resident would still be better off buying the California plan).

Next, we applied this analysis nationally and across time. For every state and year, we consider the 529 plan universe from the perspective of a resident in that state, and we project outcomes for investing in each plan. The best plan for the residents of each state is the one with the highest projected outcome, to which other plan outcomes can be compared. Averaging across plans and years, we show that the projected loss amounts to an economically large value: $38 billion over 18 years.

Why Do Households Make These Mistakes?

To examine why households make such expensive choices, we studied several explanations related to households’ inability to process information about the plans. Specifically, we asked whether people lack the financial literacy needed to fully digest the differences between 529 plans and their consequences. We also explored whether the complexity of plans’ enrollment kits increased investor costs (through effort or purchasing advice) to understand plans. Our analysis showed that fewer suboptimal accounts were opened in (1) states where people were more financially literate; and (2) in states with easier-to read plan disclosure documents.  We also checked whether investors had more information about their home-state plans than others, a result that was not borne out.


Our analysis offers several lessons for those seeking to improve outcomes for families with 529 plans. First, investors should analyze and educate themselves about 529 plan options, as this effort can boost wealth down the line. They can also consider whether out-of-state plans would be suitable: some states offer tax benefits no matter which state’s plan the household chooses, while other states offer no tax benefits (or have no state taxes) independent of which plan the household chooses. Second, states can improve outcomes for their residents. For instance, this could involve negotiating more favorable management fees (e.g., the most expensive plan in 2022 added over 0.65% in annual fees), and simplifying plan complexity (the average plan description and participation agreement consists of 60+ pages of financial and legal information). Together, these goals can produce better outcomes for 529 plan participants and their beneficiaries. Moreover, since unused 529 assets may be rolled over to retirement accounts under certain circumstances, building more 529 saving will buttress old age security as well.

Views of our Guest Bloggers are theirs alone, and not of the Pension Research Council, the Wharton School, or the University of Pennsylvania.