Morgan Stanley Bill of Rights for 529 College Savings Plan Investors

This 529 Plan Bill of Rights will help you understand 529 college savings plans and the cost and tax considerations of investing in a 529 plan. Further, it will help you understand how your Financial Advisor is compensated when you make a contribution to a 529 plan, and how Morgan Stanley may receive additional compensation from 529 Program Managers to sell their plans.

Before making a contribution to a 529 plan, we believe there are several things you should know.

I. What are my options for funding higher education?

There are many investment vehicles available to help you save for higher education expenses—including 529 college savings plans, prepaid tuition plans, Coverdell Education Savings Accounts (formerly known as Education IRAs), Roth IRAs, UGMA/UTMA custodial accounts, U.S. savings bonds, mutual funds, stocks, bonds and traditional savings accounts. Each vehicle has different tax implications, risk factors, and cost considerations. This document addresses only 529 college savings plans. Your Financial Advisor or tax professional can provide you with information about the other options and can help you decide which vehicle(s) are most appropriate for you and your family.

II. What is a 529 plan?

529 plans take their name from the section of the Internal Revenue Code that was enacted by Congress when the plans were created in 1996. 529 Plans are officially known as Qualified Tuition Plans, a tax-advantaged investment vehicle designed to help families pay for future college and graduate school expenses. There are two types of 529 plans: college savings plans and prepaid college tuition plans. Both are generally sponsored by states or state agencies. All 50 states and the District of Columbia sponsor one or more 529 plans. Understanding the differences between plan types and state-specific state tax benefits is important.

III. What types of 529 plans are available?

College savings plans are generally managed by mutual fund companies and your contributions are generally invested in mutual funds that support the plan. Your plan account will fluctuate in value and, therefore, there is no guarantee that the amount contributed to the plan will equal the amount of future education expenses. College savings plans may offer greater flexibility than prepaid plans because you are not restricted to using the account balances for a specific educational institution or within the sponsoring state. You may also be able to apply the proceeds from a college savings plan to other expenses (e.g., room and board, text books, supplies and equipment) in addition to tuition and fees. Many states offer more than one savings plan, providing residents with a choice of investment management firms.

(Morgan Stanley does not offer prepaid tuition plans from any states. The information that follows relates to college savings plans only.)

IV. What state and local tax benefits apply?
You and/or your beneficiary’s state of residence may affect your ability to qualify for the state and local tax benefits granted to 529 plan investments. Many states provide tax incentives and other benefits for state residents who invest in a plan sponsored by their home state, including:

• state tax deductions for contributions
• deferral of state income taxes on earnings which are held in the plan
• withdrawals which may be free from state income taxes
• matching grants or scholarships
• protection from creditors for certain assets.
  

Additionally, so-called, “in-state plans” often waive or rebate certain fees and expenses for state residents.

The benefits of purchasing an in-state plan generally apply only if you or your beneficiary live or pay state income taxes in the 529 plan sponsor’s state. If you invest in a 529 plan sponsored by a different state than where you live or pay state income taxes, generally you will not receive the tax or other benefits provided to residents. In addition, your state or locality may seek to recover the value of any previously taken state or local tax benefits if you rollover or transfer account assets from an in-state plan to another state’s 529 plan. If your home state offers tax and other incentives, then it is important to speak with your financial advisor or tax professional about the details of your in-state 529 plan.

Before investing in a 529 plan, you should consider whether the state(s) where you or your beneficiary live or pay state income taxes sponsors an in-state plan and whether the tax and other benefits afforded state residents are significant to you based on your particular circumstances. Your Morgan Stanley Financial Advisor can direct you to information about in-state plans and select out-of-state 529 plans and the availability of state or local income tax or other benefits offered by your in-state plans and select out-of-state 529 Plans. Other factors to consider include the variety of investment options available, including the range of investment objectives and strategies offered, risk factors related to the variety of investment options or the lack of variety, relative performance, fees and services.

V. What are the federal tax considerations?

Earnings on withdrawals from a 529 savings plan are not subject to federal income tax, if the withdrawals are used for qualified higher educational expenses at an eligible educational institution. The term “qualified higher education expenses” generally includes tuition, required fees, books, supplies, certain required equipment, and the cost of room and board (subject to certain limits). An “eligible educational institution” generally includes most community colleges, public and private four-year colleges, universities, graduate and postgraduate programs, and certain vocational schools which are eligible to participate in federal student financial aid programs.

If you make a withdrawal for purposes other than to pay your beneficiary’s qualified higher education expenses, then the earnings portion of the withdrawal is subject to federal and possibly state income tax and an additional 10% federal tax penalty.

VI. Where is my money invested?

Your contribution to a 529 savings plan is invested in a portfolio(s), generally consisting of underlying mutual funds. Although very similar to mutual funds in design and structure, a college savings plan’s portfolios are issued by state governments, and in most cases, are not directly regulated under the federal securities laws applicable to mutual funds, but rather the Municipal Securities Rulemaking Board.

Most savings plans offer the following types of investment options:

• Static Investment Portfolios. — Your contributions will be invested in a portfolio that does not change, remaining “static” over time in a specific combination of underlying mutual funds. The specific underlying mutual funds are combined to achieve a specific risk/reward relationship. You should speak with your Financial Advisor to determine if a static portfolio is appropriate for you.
• Age-Based” or “Years-to-Enrollment” Investment Options — Your contributions will be invested in a portfolio that will automatically change over time depending on the age of your beneficiary or the number of years left before your beneficiary enrolls in college (also known as the date of matriculation). The investment manager adjusts the allocation of specific underlying mutual funds and their relative weighting within the portfolio over time, generally growing more conservative over time.
• Individual-Fund Investment Options — Your contributions will be invested entirely in one or more portfolio(s) consisting of a single underlying mutual fund and, like static (multi-fund) portfolios discussed above, will not change unless your or your Financial Advisor make an exchange.

VII. What fees and charges apply with 529 plans?

529 savings plans’ fees and charges can be divided into two major categories—charges that are made by the 529 plan sponsor to support the plan and those made by the underlying investment options to support the underlying funds.
Fees Charged by the Plan
529 savings plans assess some fees based on the amount of assets in your plan account, and other fees on a transactional or periodic basis.

• Program Management Fees — The Program Manager of each 529 savings plan generally receives a program management fee. The program management fee compensates the manager for providing investment advisory, distribution, marketing, accounting, and other services to the plan. The fee is generally assessed as a percentage of portfolio assets.
• State Administration Fees — To help pay for the operation of the plan, some state sponsors of 529 savings plans charge a state administration fee assessed as a percentage of portfolio assets.
• Annual Maintenance Fees/Enrollment Fees/Termination Fees — These fees are generally imposed as a specific dollar amount, and apply at specified times or upon certain events (e.g., initial purchase, termination, on the account anniversary).

Plan management fees and state administration fees may vary by unit class within a particular plan.Fees Charged by the Underlying Investments

529 plan investment options generally assess the following asset-based fees:

• Underlying Mutual Fund Expenses — Each investment portfolio indirectly bears a proportional share of the fees and expenses incurred by the underlying mutual fund(s) (e.g., investment management fees and other expenses).
• Distribution and/or service fees — These fees, similar to the “12b-1” fees charged by some mutual funds, generally range between 0.25% and 1.25% of your investment, annually. Your Financial Advisor receives a portion of these distribution fees as on-going compensation for selling the 529 plan.

529 Plan Share/Unit Class Differences
Most 529 plans offer different “unit” class pricing options similar to the share class pricing arrangements offered by open-end mutual funds. For these purposes, the terms “unit class” and “share class” are interchangeable. Each unit or share class of a particular investment option within a plan has an expense and sales charge structure based on the various types of asset-based fees, other fees and expenses and sales charges assessed. Your time horizon for investing and the amount you expect to invest can be a significant factor in determining which unit class is suitable for you and your beneficiary.

Class A Units — Class A units are subject to a sales charge or front-end load that is deducted as a percentage of the amount of your initial contribution. The net amount of the contribution (after the deduction of the initial sales charge) is invested in units of the Plan’s portfolio(s).

You may be eligible for sales charge reductions or “breakpoints” based on the size of your investment in the 529 savings plan. In addition, you may qualify for “rights of accumulation.” These are further discounts when the amount of your 529 plan investment is combined with other assets which you and your immediate family members already have invested in the plan and/or in certain mutual funds managed by the manager for that plan. Specific rules for achieving breakpoints vary from plan to plan.

Class B Units — Class B units are not subject to an initial sales charge or front-end load. However, distributions of Class B units are subject to a contingent deferred sales charge (CDSC), which is a percentage charge deducted from withdrawals from the plan if they are made within a certain number of years. The CDSC gradually declines to zero over a period of years — typically six to eight. The CDSC may be waived under certain circumstances. Class B units are subject to higher on-going asset based fees such as higher distribution or service fees, plan management fees and/or state administration fees as compared to Class A units of the same plan.

Class C Units — Like Class B units, Class C units do not have a front-end sales charge. However, Class C units have a lower CDSC than Class B units (generally 1%), and the period during which the Class C CDSC can be imposed is shorter (generally one year). However, like Class B units, Class C units are subject to higher on-going asset-based fees such as higher distribution or service fees, plan management fees and/or state administration fees.

Over time you may end up paying higher fees and expenses and may experience lower investment returns with Class B and Class C units than you would with Class A units because of the accumulated impact of higher ongoing asset-based fees.

In order to understand what your investment will cost, you should carefully review with your Financial Advisor or tax professional the 529 plan offering materials which describe all the fees and expenses associated with a particular plan.

529 savings plans typically are managed by investment management firms. They may be offered directly to investors (“direct-sold”) through a toll-free number and Web site or, in the case of many states, through your Financial Advisor (“advisor-sold”).

Most states offer more than one 529 plan. Some states offer both advisor-sold and direct-sold savings plans while other states only offer direct-sold savings plans. The cost of investing in an advisor-sold savings plan is generally higher than a direct-sold savings plan because of the amounts that are payable to the selling firm.

Your Financial Advisor may not be authorized to offer you every state’s 529 plan. It is important for you to investigate what your home state has to offer in addition to speaking with your Financial Advisor or tax professional.

IX. Can a 529 plan impact financial aid?

Assets held in a 529 plan, both savings plans and prepaid tuition plans, may affect your ability to qualify for financial aid. Generally, assets held in 529 plans affect the ability of a student to qualify for need-based financial aid less than if those assets were held in a custodial account. Please make sure to investigate how financial aid could be affected by the 529 plans you are considering.

Your ability to contribute to a 529 plan is not limited by your household income. However, each state limits the total amount of contributions made on behalf of a particular beneficiary. The purpose is to prevent contributions being made on behalf of a particular beneficiary in excess of the amount necessary to provide for his or her qualified higher education expenses. The contribution limits on 529 savings plans are generally much higher than those available for other college saving options (e.g., Coverdell ESAs). These limits vary by plan and do not necessarily mean that this option is best for you and your family.

Also, a gift of more than $12,000 to a single person in a single year is subject to federal gift tax. With a 529 plan, an individual can potentially contribute up to $60,000 (and married couples can potentially contribute up to a total of $120,000) to an account for a particular designated beneficiary in one year without triggering the tax. To do this the contributor must elect to treat the entire gift as a series of five equal annual gifts. The five-year prorating is elected by filing a gift tax return for the year in which the gift is made. You should consult with a tax advisor regarding the gift and estate tax consequences of contributing to (or making any other transaction with respect to) an account.

For most 529 savings plans there are no residency requirements. In general, most U.S. citizens or permanent residents are eligible to set up a 529 plan for any beneficiary, including themselves. You must satisfy the age requirement for the applicable plan. Each plan has its own eligibility requirements, so please consult your Financial Advisor or the plan offering documents for more information about them.

529 plan sponsors pay Morgan Stanley compensation when we sell their 529 plans. The amount of the compensation that Morgan Stanley receives is a function of the unit/share class that you purchase, and for certain unit classes, the amount of your purchases. We pay a portion of the compensation to our Financial Advisors. In general, the percentage of compensation received by Morgan Stanley that we pay to our Financial Advisors (their payout rate) depends upon the type of pricing option and account you have established with us as well as the particular product you purchase. In addition, in general, the greater overall revenue each Financial Advisor generates each year, the higher his or her payout rate.

Clients are welcome to ask their Financial Advisor how he or she will be compensated for any 529 plan sale. For a more detailed discussion of how Morgan Stanley and your Financial Advisor are compensated for investments and services, please ask your Morgan Stanley Financial Advisor for a copy of our annual FYI disclosure.

Morgan Stanley has entered into revenue sharing arrangements with many of the fund companies that sponsor 529 plans that the firm distributes. The revenue sharing agreements with those funds currently apply only to sales of such funds outside of the 529 plans. Consequently, while Morgan Stanley does receive additional compensation from these fund companies based on fund sales, and total assets with these funds, we do not receive any additional amounts for sales or assets attributable to 529 plan sales. Morgan Stanley reserves the right to alter these arrangements at any time.

The information in this Bill of Rights is as of April 30, 2007. For additional or more current information, contact your Financial Advisor.