Recent statistics on declining 529 plan assets and sales means the industry "took a fairly big step backwards," says Jeff Troutman, vice president of college savings at Fidelity Investments.
Nonetheless, Troutman says Fidelity's sales have held up relatively well. "I think the real impact has been mostly in new account openings," he notes, adding that strong flows coming from existing accounts indicate that parents currently in 529 plans are consistent, long-term contributors. And those who are tend to be more prepared to handle college costs.
In May, Fidelity released a survey showing that parents of children ages 15-18 who use 529 plans are on pace to cover 46% of college costs. Parents with children of similar ages who don't utilize 529s are on course to cover only 17% of costs.
Troutman says the big issue now is the uncertainty about college loans, which are expected to become more difficult to get and which may perhaps carry higher interest rates and less favorable terms in the future. That will allow advisors to broach the topic of 529 plans as a steady financial underpinning to a college education.
529s In Practice
No doubt that 529 plans are complex beasts with lots of moving parts. A recent poll on savingforcollege.com, a comprehensive clearinghouse for all matters relating to college savings programs, recently asked readers to rate how confusing they thought 529 plans are. Among respondents, 19% chose the "much too confusing" option and 54% agreed with the statement that they're fairly confusing and take a significant effort to understand.
"There are a lot of different aspects to consider such as taxes, control and fees," says Susan Elser, a CFP licensee at Elser Financial Planning in Indianapolis. "Advisors can provide a lot of service to help clients understand them."
That might explain why 67% of total 529 accounts are sold through advisors rather than sold directly through the states, according to the Financial Research Corp.
When it comes to college savings, Elser relies almost exclusively on 529 plans because of their tax advantages. She used to opt for Utah's low-cost plan, but for Indiana residents she now favors using the plan offered by JPMorgan Chase through the state of Indiana, which enacted a 20% tax credit for in-state residents for contributions of up to $5,000. (Upromise Investments is scheduled to take over as manager of JP Morgan's Indiana program in mid-2008).
Elser also likes 529 plans as an estate planning tool. "It's the only estate planning strategy where the assets leave your estate but not your control," she says. "The owner decides when to distribute it, can change the beneficiary and decides how it's invested."
Mark Gleason, a senior financial advisor at Wescap Management Group in Burbank, Calif., formerly used custodial accounts to help a lot of his clients save for college. But he says recent changes in the so-called "kiddie tax" laws make that a less-appealing option. (For 2008, the ceiling on the kiddie tax was raised from 18 to 19 years, or 24 if they are full-time students and don't have earned income equal to half of their annual support.)
"That's pretty much dead as a college planning tool," says Gleason, whose firm has shifted its focus to 529 plans. California doesn't provide any tax credits, so Gleason opts to use Virginia's College America program, which comprises a lineup from American Funds. Gleason likes the program's reasonable costs and that it gives him lots of options to tailor a plan to a client's needs.