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Alpha Fees with Beta Returns: An Analysis of Individual Investors Response to Disclosures of
Taxes and Returns in 529 College Savings Plans
Raquel M. Alexander,
University of Kansas
Leann Luna, University of Tennessee - Knoxville
ABSTRACT. With the decline of corporate and government defined-benefit pension plans, and talk of revamping and privatizing a portion of social security, U.S. citizens and tax policy makers are placing greater emphasis on tax-subsidized individual investment accounts. Using an investment vehicle available only to consumers (529 college savings plans), we examine the role of disclosures, fees, tax-subsidies, and returns on individual investor choice without the effects of institutional investors. We also look at the portfolios available for investors and find only 26 of 3,140 529 plan portfolios had a statistically significant positive alpha. These findings suggest that 529 consumers are offered inferior portfolios and pay alpha fees for beta returns. We find support that investors are responding to historical return disclosures; however, 529 plan investors’ investment strategy may be suboptimal because investors ignore state tax benefits.
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