rsinj, I will try to respond to your various comments in some orderly fashion.
Regarding diversification, I was responding to bwilk's thoughts on the subject. Per discussions and reading on the subject it is generally thought that about 20 stocks represent a reasonably diversified portfolio. I do not see it as a big problem to keep track of this, anymore than one would have to keep track of a non-DRIP portfolio of the same number of stocks or even a mutual fund with reinvested dividends. Yes, one would pontentially have to enter 20 line items for dividends and/or sales on his tax return but for the cost savings that does not seem to be big burden. Keeping the statements should make calculation of the cost basis a fairly straight forward matter when the stock is sold even if the company or its agent could not provide that information if requested.
As far as costs I never said they were ever free but rather low cost. I recently purchased four of these (McDonald's, Microsoft, Walmart and Disney) and none charge a yearly fee nor a dividend reinvestment fee (except if you own over 100 shares of Microsoft, which charges 5% of the dividend if you have over 100 shares, to a maximum of $3). One has to compare these costs to the expense ratio of a mutual fund charges or brokerage fees on a conventional account to see what advantage might be gained. If fee structures change, then one has to reevaluate the situation at that time.
As far as an individual feeling he can do better than a professional managing a mutual fund, that is a matter of personal choice. You indicate that you feel an individual has a benefit here in that he can quickly move in and out of stocks. That is fine if you are an active investor that closely follows his portfolio. However, wouldn't the record keeping be just as much as a burden as using DRIPs?
Concurring with bwilk's comment that many people do not feel comfortable with selecting individual stocks and therefore prefer having mutual fund manager handle their investments. You are correct that many fund managers do not do well, but by definition half perform below average. Factor in fees and even less make average returns. However, one can weigh that against putting in time and effort to manage his own account. One of the nice things about a 529 is its simplicity; you give the custodian the money and forget about it until the beneficiary is ready for college.
Joe Hurley discussed an index fund in his latest email newsletter that charges 0.25% annual fee + $25. These low fees can be attractive to a passive investor and should return reasonably close to overall market returns over time.
I believe you should be more tolerant of other's views on this subject. If you feel you can do better than the market through active trading, so be it. However, others feel differently and I think you have to be more objective in recognizing there are other approaches than your own, with pluses and minuses to those approaches.