529 Plans Could Face New Restrictions
If the Bush Administration's 2006 revenue proposals are enacted,
financial planners will need to be aware of new restrictions in the use
of 529 college savings plans, experts say.
The most prominent 529-related budget proposal is good news for proponents of the plans: making permanent the tax-free distributions on qualified 529 plans, which under current law would expire in 2010.
But other proposals could limit the way clients are currently using the plans, particularly in cases where they are used more as an estate planning vehicle rather than a college-savings tool.
"It would relieve the uncertainty of whether they would continue beyond 2010-that is the one blessing of the whole thing," says Bill Johns, a certified college planning specialist and member of the National Institute of Certified College Planners. "The rest of the changes require more of an awareness that they are tightening up the characteristics of the plan."
Among the proposals:
Third-party contributions to 529 accounts would be prohibited.
The penalty on nonqualified withdrawals would be increased from 10% to 20% when the withdrawal is made for the contributor 20 years after establishing the 529 account.
Beneficiaries who are not the plan's original ones would be subject to a 35% excise tax on nonqualified distributions over $50,000. The tax would increase to 50% on distributions of $150,000 or more.
Only trustee-to-trustee rollovers would be permitted.
A plan contributor could not transfer account ownership to another person, although an administrator could be named to administer the account.
All 529 plans created before the regulations are enacted would not be affected if they stop taking contributions. If contributions continue, the new rules would apply.
One change that may be felt most by advisors and their clients, John says, is the rule that would prohibit third-party contributions. Under existing rules, parents can set up a 529 plan for their children, and grandparents, aunts and uncles can simply write a check into the account.
Under the proposal, John says, a relative would instead have to set up their own account to contribute to the beneficiary's college-savings.
Another tactic that will be impacted is the use of 529 plans as estate planning tools. "These plans have been used quite a bit for estate planning purposes, with people being able to gift large amounts into them," John says.
The doubling of the nonqualified withdrawal penalty in cases where the contributor makes the withdrawal is designed to discourage the use of 529 plans as, essentially, "giant Roth IRAs," he says.
View Boomers As Four Separate Groups, Oppenheimer Says
The time to think of baby boomers as one homogenous group is over, according to a recent survey by OppenheimerFunds and Matthew Greenwald & Associates. The survey finds that the about 75 million people born between 1946 and 1964 can be classified into four major groups, and this can help advisors work with them.
Two groups of boomers, called smooth sailors (21% of nonretirees) and nervous nellies (27% of nonretirees), are far better prepared for retirement than the rest of their cohort, even though their attitudes diverge dramatically. Fifty percent of smooth sailors have an exact dollar amount of assets they will need to retire, and 22.5% of them have at least $1 million in assets. However, overconfidence could be a problem for them, since 87% say they are very prepared for retirement, considering their age, and 82% consider themselves good or excellent investors.
Nervous nellies are the ones most likely to have a written financial plan-fully 75% of them do-but 87% of them are spooked by the possibility of a future market collapse and 80% are worried about rising medical costs. As a group, they are more likely to have an advisor, and they don't trust their own investing skills. Oppenheimer executives note that while advisors can't control market volatility they can structure portfolios that will ease nervous clients' fears.
The flip side of the spectrum includes unrealistic optimists (29% of nonretiree boomers), who are living in a dream world. Although only 15% consider themselves very prepared for retirement, 99% are looking forward to a comfortable retirement. However, 58% expect to work in retirement.
The final group is called the pensive procrastinators (23% of nonretirees). Although 46% of them have less than $200,000 in savings and investments, 76% expect a comfortable retirement. Like the unrealistic optimists, 60% expect to work in retirement and more than 25% of them have already dipped into their retirement accounts.
Teslik Discusses CFP Board Changes
A few months into her job as CEO of the CFP Board of Standards, Sarah Ball Teslik is aiming for sweeping changes in how the organization serves its certificants and the public. Among the expected changes at the CFP Board: a greater utilization of Web-based services, a streamlining of operations and more focus on reaching out to the public.
That should include giving CFP licensees the ability to renew and check on their certifications online, as well as the possibility of taking the CFP exam itself over the Web, Teslik says. The CFP Board Web site will also provide more information and tools to the public, including audio-visual presentations, she adds. "We're not getting to under served populations as well as we would like to," Teslik explains. "We're not there yet in terms of helping the public."
Teslik didn't hesitate in making changes after taking over the CEO post on November 1. Just a little more than a month later, on December 13, she laid off fully one-third of the organization's staff, which at the time numbered 78 employees.
The hardest hit departments were in information technology and external communications, Teslik says, adding that the layoffs did not reflect badly on the employees themselves. Noting that the CFP Board is growing and has "plenty of money," Teslik says the cuts were not to cut costs, but to improve efficiency. Those two departments in particular, she says, were rife with redundancies and duties that are easily outsourced.
As one example, she noted that there were four people responsible for reading newspapers and searching for trademark violations and stories about the CFP Board. "They had the most redundancies," she explains.
There were also layoffs, but to a smaller extent, in the legal and finance departments. The professional review department and the organization's core certification services were largely untouched, she adds.
At about the same time, the organization embarked on a four-year plan to upgrade its information technology infrastructure. The first phase of that plan, which involved centralizing all the organization's stored information into one central database, largely has been completed, she says.
The second phase of the plan will be implemented between now and the late summer, when CFP licensees and the public should see a gradual increase in services offered over the Web. Certificants, for example, will soon have the ability to make credit card certification renewals at the Web site. "You will see us trying to use the Web, which enables us to do things that we couldn't have dreamt of five years ago," she says.
New Challenges For Pension Funds
Pension funds, endowments and foundations are facing new challenges in a low-return environment, and are adopting asset allocation strategies designed to maximize alpha, according to a new report.
The report by Greenwich Associates, which specializes in consulting and research focusing on the financial services industry, states that pension plans in particular are facing a funding gap.
Among the factors hampering pensions are low interest rates, a low-return market, increased future pension obligations and, in the case of corporate sponsors, either an inability or unwillingness to make pension contributions.
Among the strategies being adopted are a shift of assets from fixed income to equities with higher expected returns, including international stocks and alternative investments, according to the report.
NFP Acquires Highland Capital
National Financial Partners, a distributor of financial services products to high-net-worth and business clients, has signed an agreement to buy the Highland Capital Holding Corp. insurance brokerage company.
NFP will pay up to $48.4 million in cash and stock in the deal, which is expected to close in the second quarter.
Highland Capital Holding will be NFP's largest acquisition since the company was founded in 1998. The acquisition will give NFP a network of 11 divisions comprising 21 brokerage general agent offices, with combined revenues of about $62 million in 2004.
Based on 2004 earnings, NFP says it expects Highland to contribute about $8 million to NFP's gross profit margin on an annual basis. NFP had sales of $639.5 million in 2004 and earnings of $40.1 million, which represented a 70.6% growth in profits over the previous year.
"In addition to Highland and since our fourth quarter earnings release, NFP has completed two transactions with combined acquired base earnings of $2.1 million effective March 1," says Jessica Bibliowicz, NFP's president and CEO. "Upon closing of the Highland acquisition, our total acquired based earnings in 2005 will be $15.8 million, which is slightly ahead of our goal of $13 to $15 million."
She noted that 45% of Highland's life insurance production is from the institutional market, including national and regional banks, trust companies and broker-dealers.
She said the institutional market is a new one for NFP and "one that has tremendous potential for increased penetration ... We are very excited about the growth opportunities that Highland brings to NFP."