From the September 2009 issue of Boomer Market Advisor • Subscribe!

September 1, 2009

529 Plans: Still a good boomer bet?

Despite recent state-initiated lawsuits, 529 inflows keep increasing and boomer parents keep saving for college.

So, it's been rough. The Dow is down more than 2,500 from a year ago (as I write this), and unemployment has skyrocketed. Boomer parents are doubly at risk, as their retirement plan assets crumble and even some of those relatively safe college savings vehicles, 529 plans, lose chunks of value.

The biggest example of parents facing the roundhouse half of the one-two combination punch is the drama with the Oppenheimer Funds Core Bond Fund. Several states' 529 plans had assets with Oppenheimer in the Core Bond Fund, which was touted as safe.

Turns out, the fund had some commercial mortgage-backed securities in its portfolio, and, as you've read or can probably guess, the fund lost more than 35 percent of its value when the real estate market bottomed. At least five states--Illinois, Oregon, Maine, Texas and New Mexico--are seeking remuneration for parents who had their children's future tied up with the Core Bond Fund.

No matter the outcome of those suits, the impact on consumer perception--and how that affects advisors' ability to convince clients to save--is yet to be seen, especially with 529 plans still flying under the radar.

There is some good news to go along with all of this, however. The first item concerns the number of 529 plan accounts in existence. According to the College Savings Plan Network, there were more than 11 million 529 accounts open at the end of 2008, which is a fraction of the college-bound population in any given year, but that number is up from fewer than two million accounts in 2001. (Every state and the District of Columbia had plans by 2002.)

Another bit of potentially good news comes from a joint Sallie Mae-Gallup survey of parents with children under 18 who are likely to attend college. The survey found that, despite economic conditions, saving for college is still a priority, as 52 percent of parents with children intending to go to college are saving the same amount or more for higher education compared to a year ago.

Those statistics aren't going to convince anyone to cancel College Savings Month this year (see sidebar) and declare the savings crisis over, but they are positive signs.

And the Sallie Mae-Gallup numbers line up with what some advisors are saying.

"I think there was more skepticism 18 months ago than there is today," says J. Graydon Coghlan, president and CEO of Coghlan Financial Group Inc. (www.cfgretire.com), in San Diego. "I'm seeing more people say, 'Let's do what we need to do.' They're wanting to participate again."

Coghlan adds that many of them are taking a more conservative investment attitude, but with the shakeout from the Oppenheimer lawsuits still on people's minds--especially fund managers--many of the funds are going to be more conservatively placed, too, so attitudes may be more in alignment than ever.

Finding that sweet spot between a conservative posture and the need for growth is also a chance for advisors to exhibit their value to their boomer clients. They'll do so by investigating 529 plans' underlying assets and making sure they are what managers claim they are.

"Most clients won't look at a prospectus," says Jay Murray, president of Denver-based Solutions for Tuition and a financial advisor with Geneos Wealth Management. "That's a role the advisor can fill. He has to be willing to read and do the research." Advisors need to make sure the bonds are as safe as the funds claim. And that the plans perform.

OUT OF STATE?
Setting up a client's 529 plan isn't as easy as figuring out what's available in your home state. While the home state's plan may, in fact, be the best plan due to tax incentives, other plans' performance may outweigh a home-state plan (see sidebar for the top five-, three- and one-year advisor-sold plans).

Recommending out-of-state plans, however, carries its own risks, as regulators will want to know why an advisor would put a client's money in an out-of-state plan.

"Unless you can show that another plan is a better bet," Murray warns, "you better put them in their own state's plan." That said, however, "A lot of state plans aren't that good."

Murray and Coghlan both agree that no matter the plan you place clients into, parents have to make contributing regularly a habit, especially if the time horizon is short.

"Parents have to stay on track with a savings program, no matter what it is," Murray says. "You can't stop even though the markets are down. The key is to keep contributing monthly."

That's a habit many advisors have to instill in their clients, and it's not easy when parents are squeezed by college and retirement. Coghlan walks his clients through a 35-page proprietary income analysis, which is essentially a retirement plan review. But he likes to run through it backwards with clients, starting with when they want to retire and working toward today, finally landing on a number that shows parents what they need to start contributing to generate the income they're going to need.

What many clients find, Coghlan says, is that their retirement age gets pushed back a few years, whether because of an inflated perception of what they could save or because of recent losses. Either way, he reminds them that college is usually the more immediate need, and while a 529 plan may not always be the answer, when it is, it needs to become an immediate part of the savings plan and it needs to be contributed to monthly.

So the squeeze is on for boomer parents. They want to make sure their children get the education they need to succeed, but they want to make sure they provide that education with a vehicle that performs. A 529 plan is the answer for many families, despite recent negative press and despite markets that are down significantly. Every year, surveys find that college saving is near the top of the priority list, usually right behind retirement saving, so advisors who can assuage fears about fund performance and who can also show boomers a way to save for both hold the keys to creating happy, educated, retired families.

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