How Investors Respond to Disclosures: The Case of 529 College Savings Plans

Abstract

We examine a new government-sponsored investment vehicle available only to individual investors, 529 college savings plans, to analyze consumers’ investment behavior after a significant change in disclosures of historical investment returns and tax benefits. We find evidence that disclosures affect investment decisions. After 529 plans voluntarily adopted more informative disclosures, 529 plan investors selected fewer plans offered only through broker-sold channels and increasingly chose plans based on past investment performance. We enhance the Fama-French model to perform a descriptive financial analysis of 529 plan offerings and find compelling evidence that 529 investors are constrained to invest in funds with return-eroding high 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 discuss 529 plan oversight and potential implications for self-directed retirement savings and social security privatization.

Keywords: 529 plans, investor behavior, savings taxes

JEL Classification: D18, D42, D83, E21, E44, E62, G14, G18, G20, H24, H71, K34