Are Higher 529 College Savings Plan Fees Linked to Greater State Tax Incentives?

Despite the fact that 529 College Savings Plans have existed for over a decade, there has been limited scholarly attention on investment questions related to this savings vehicle. In some of the first academic literature on this topic, Alexander and Luna (Supplement 2005) identified a surprising relationship between 529 College Savings Plan participation and plan fees. They found a positive relationship between participation rates and fees. While they link this counterintuitive result to plan marketing efforts by brokers, I propose an alternative view. In my data which covers a five year time span, I find no significant relationship between participation rates and fees. However, when investigating the tax incidence with respect to 529 plans, I find a positive relationship between state tax rates and 529 plan fees. This suggests that investment companies could be opportunistically setting fees to usurp the benefits which state governments intended for investors. Since state tax incentives are designed to induce participation and plan fees (by design) are correlated with these incentives, the positive link between plan fees and participation becomes less of a puzzle.