Most people are using advisors to invest in 529 plans.
Financial advisors are now playing a central role in the way state-sponsored 529 college savings plans are marketed.
In fact, advisors are responsible for at least 70% of all new accounts, according to various estimates. When states initially introduced plans, many managed and sold them directly to the public. Now more states are sponsoring additional plans and partnering with firms to handle management and distribution. Although many plans still allow individuals to invest directly, many can also be opened through brokers-and some only can be opened through brokers.
Why the change? Beverly Moore, managing director of retail markets for New York Life Investment Management (NYLIM), says more plans and distribution channels can mean more revenue for states. But first and foremost, states need to be mindful of providing proper service, and financial intermediaries can help with that, she says.
In fact, 529 college savings plans have great advantages, but many people still are unaware of them. Add to that there are now so many plans-all with different rules-that they aren't easy to compare. "They are a fairly complex vehicle, which lends itself well to advisor distribution," comments Whitney Dow, director of education savings research at Financial Research Corp. (FRC) in Boston.
"Some states have enlisted direct marketing firms and have concluded they need to have a program distributed by financial advisors as well. People need guidance and assistance to help them integrate 529 plans. Some people will buy direct, but a large majority want to do their financial investing through an advisor," says Fern Gartenhaus, second vice president and 529 plan product manager for NYLIM, which distributes and markets New Mexico's CollegeSense plan.
Michael Lane, TIAA-CREF's director of advisor services, notes the Mississippi and Missouri college savings plans that TIAA-CREF manages recently added broker-sold plans, and the firm already has signed on more than 100 broker-dealers to sell them. Another trend is that more plans are moving toward an IRA-type model, with a wider selection of funds and multiple share classes, Lane adds. TIAA-CREF is involved in plans in 13 states, including California, Connecticut, Georgia, Idaho, Kentucky, Michigan, Minnesota, Mississippi, Missouri, New York, Oklahoma, Tennessee and Vermont.
Tracy Lemoine, Fidelity Investments' senior vice president of program management and development for 529 plans, says advisors see the plans as relationship builders for their practices. Although more investment alternatives now are being offered, age-based pools remain the vehicle of choice, she says. Fidelity manages plans in New Hampshire, Massachusetts and Delaware.
In an attempt to make higher education more affordable and encourage saving, Congress enacted many tax benefits for state-sponsored qualified tuition plans (QTPs), which include prepaid tuition plans and college-savings plans. Most QTPs were introduced after the Small Business Job Protection Act of 1996 clarified their federal tax treatment at Section 529 of the Internal Revenue Code.
Since then, college-savings plans have become significantly more popular than prepaid tuition plans. That's partly because the money saved in college savings plans can be used at any eligible institution, regardless of which state sponsors the plan or where the contributor lives, according to Linda Levine, a labor economics specialist, in a 2002 report to Congress.
Earnings accumulate tax-deferred in college savings plans, and beginning in 2002, withdrawals to pay for qualified education expenses became free from federal income taxes. Individuals may contribute up to $11,000 a year per beneficiary as a federal-tax-free gift, and five years' worth of such gifts can be accelerated into a one-year contribution of $55,000. Some states offer income tax deductions and other benefits to residents who contribute. Unlike other college savings vehicles, high-income earners can participate and much more can be accumulated. Also, a plan's beneficiary can be changed.