Because states have different plans, it's important for advisors to look at which one offers the most benefits for particular clients."The programs that get high ratings are the ones that incorporate all the flexibility allowed under federal law. I prefer not to see a state add additional restrictions that federal law doesn't require," Hurley comments. "I like to see good solid investment options available under the program. I want to make sure the program is administered in a good fashion, that the materials are good. The TIAA-CREF program in a number of states, like New York, Missouri and California, is good. Merrill Lynch has a good program in Maine. Fidelity is doing well in New Hampshire, although it doesn't offer all the options of some of the other programs."
It's important to see whether the state in which the potential account owner lives offers any tax benefits for participating that he or she wouldn't get in another program, he adds. "More and more, that's the case. In New York, for example, I get to deduct up to $10,000 in contributions if I use the New York program. I'm not going to get that in another program," Hurley says.
Other benefits also may make a plan stand out for certain clients. "For example, Minnesota is coming out with a plan in the first quarter of 2001, and Minnesota has decided to provide a match that will act like a 401(k) that will match the contribution," Klane says. "But that match is only for taxpayers who make less than $80,000 a year. For those who make more than $80,000, they might want to look to another state's plan for different investment options or more flexibility."
Another important factor is who manages the plan. "There are different investment managers and choices, and different management fees among those choices. TIAA-CREF, for example, manages nine or 10 plans, but management fees vary. Some states offer plans with fees as low as 65 basis points and some are as high as 110 basis points," Klane says. As far as investment choices, many states offer age-based plans in which the younger the beneficiary, the greater the allocation to equities, he continues. As the child gets older, the plan is weighted more toward fixed-income securities. Some states have a 100% equity option, some are 100% aggressive, and others offer a guaranteed-income options that pays 3% to 4%, Klane says.
How easy a 529 savings program is to set up can also be important, says Howard Kaufman, president of Financial Advisors Ltd. in Buffalo Grove, Ill. "When I talk to clients, I ask them if they have any real preferences for companies they want to work with," says Kaufman, who has established plans for his three children, who range in age from 5 to 13.
Other Issues
What might affect the plans in the future? Congress making earnings tax exempt on 529 savings plans would be a positive, but other actions might decrease their desirability. "If the government increases the amount you can contribute to an IRA to $5,000, the dollars that might otherwise go to education savings might go there. They could increase the contributions for education IRAs to $2,000. They could change the tax-rate structure and decrease capital gains. If 529 plans remained taxable as ordinary income to the child, then custodial plans invested in mutual funds might give a better answer," Hurley says.
He adds that the IRS is coming out with final regulations on 529 plans at some point, and the agency could tighten up the estate and gift-tax rules that relate to the plans. Eliminating or reducing estate taxes might affect the amount of money put into the plans, but that actually might increase contributions because people wouldn't have to be concerned about gift-tax exclusions and how to use them, he says.
Eventually, Hurley believes, one type of plan will dominate what's offered by the states, making them much easier to understand. Plans already are moving in that direction. "State legislators, when they came up with the original bills creating the plans, put in excess baggage, but they've started taking that out. California is a good example. They had a lot of unnecessary restrictions in the original legislation, and they've been removing that. States are approaching a similar model, one that really incorporates all the flexibility available."