Dear Mr. Berko:

My broker at Merrill Lynch tells me that the best 529 plan he knows about is the Maine NextGen plan. He believes it will do very well over the next nine years, until my daughter becomes 18 and is ready to attend college. I would fund it with $25,000 today and then invest $500 a month for the next nine years, which should (assuming a modest 8 percent return) provide my daughter with enough money to pay for all her college costs.

Though you don’t like 529 plans, do you think that this plan, which is managed by Merrill Lynch, could be the exception to the rule? I showed my broker an article you wrote many months ago that really criticized these plans, and he thought you were crazy.

D.S., Delray Beach, Fla.

Dear D.S.:

I admit to being crazy and gladly so, because it keeps me from going insane.

Meanwhile, the Maine NextGen 529 College Investment Plan is probably the best plan your broker knows about, because it’s probably the only plan your broker knows about. According to the May 1 issue of Registered Representative magazine (an industry publication for stockbrokers), a Merrill broker can only sell the Maine NextGen 529 Plan because it contains Merrill Lynch mutual funds.

Yes, the Maine NextGen 529 plan is the exception to the rule — because of its exceptionally poor performance. But don’t take my word for it. According to Registered Representative, “Morningstar has ranked the Maine NextGen 529 plan as one of the five worst because of its high fees and middling performance.” But what a superb tribute to Merrill Lynch and its great sales staff, because in spite of its mind-numbingly poor performance and high costs, the Maine NextGen 529 plan has more client assets than 83 of the 88 plans reviewed by the venerable Morningstar organization. So I earnestly recommend that you find another broker because this one seems to be dumber than a bowl of mice.

I don’t like nor will I recommend 529 plans loaded with high-commission mutual funds stuffed with egregious management fees and other costs. Most parents want to be certain that their Little Suzy’s college money will be there when she’s ready to matriculate. But the only certainty parents can have with a mutual-fund-invested 529 plan is a “guaranteed maybe.” That’s not good enough.

I’m bullish on the Dow for the long term, but what if the market takes a dive and turns ugly the year before Little Suzy begins her freshman year? Virtually every 529 plan loaded with mutual funds got hammered during the last market debacle, and their values sank into a deep abyss. So if you needed to take out $20,000 a year in 2001, 2002, 2003 and 2004 to pay for Little Suzy’s college costs, you’d be walking on your uppers today.

Even today, most 529s established five or six years ago are still way behind the eight ball. If the certainty of having enough money to pay for Little Suzy’s college years is important to you, then don’t even breathe within 10 miles of a mutual-fund-invested 529 plan. Such a plan usually implodes when you least expect it and most need it.

Those 529 plans are great moneymakers for the broker and the broker’s firm but a failure for the investor. Frankly, I don’t know a single investor who has successfully used a 529 equity plan to pay for his kid’s college costs.

However, you could consider the Florida College Investment Plan, which can be used at Florida’s 11 state universities, most private colleges in the state and most colleges out of state. If your Little Suzy is 9 years old, all you have to do is give Florida’s prepaid plan a check for $23,000 today, which guarantees Little Suzy four years’ tuition, all student fees and two years’ room and board. It’s certainly a lot less costly than a $25,000 down payment plus $500 a month for nine more years with the Merrill Lynch Maine NextGen plan.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net.

© Copley News Service