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529 Plans Getting A Second Look

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Section 529 college savings plans have been slow to endear themselves to insurance agents and brokers.

When the Internal Revenue Service issued Section 529 of the Internal Revenue Code back in 1996, it included many provisions that could make 529 plans good deals for agents clients.

But some states, including New York, refuse to allow agents to collect commissions.

Some investment companies that manage 529 programs shut out brokers, even in states where the rules permit vendors to pay commissions.

A case in point is Teachers Insurance and Annuity Association-College Retirement Equities Fund, New York, which manages 529 programs for several states. TIAA-CREF doesnt currently sell the 529 through agents.

“Some of our products are available through brokers, but our history has been as a direct-marketer,” says Patrick Connor, a TIAA-CREF spokesman. “That doesnt mean we will never have a 529 product that will be sold through a broker.”

In fact, forecasters are predicting that at least eight investment companies will be offering 529 plans through brokers by year-end, says Christopher Stack, managing consultant at an affiliate of L.L.C., Rochester, N.Y., that trains financial advisors.

Manulife Financial, Waddell & Reed, and American Express Financial Advisors have either launched plans recently or will do so soon. (See NU, June 11.)

Tax savings and other benefits make the 529 plans attractive to multiple generations of clients, Stack adds.

Among the benefits are high contribution limits (over $200,000 in many states); tax-deferred growth; and, after Jan. 1, 2002, tax-free qualified distributions, when distributions are used for college expenses, such as tuition, room and board, and books.

For the remainder of this year, qualified distributions will continue to be taxed at the students income tax rate.

Once a state hires an investment company to manage its 529 assets, the vendor can set up its own version of a 529 plan and offer it nationally. About 35 states are currently sponsoring a 529 program.

Among the vendors offering 529 plans through brokers, Stack says, are Alliance Capital, New York; Putnam Investments, Boston; Union Bank and Trust Company of Nebraska, Lincoln, Neb.; Salomon Smith Barney, New York; and Merrill Lynch, New York.

Dreyfus Corp., New York, is expected to enter the 529 market and begin selling plans through brokers sometime in the next six months, Stack says.

“Agents are going to have a broader choice as the year progresses from different products, and they should look at those other options,” Stack says. “Were seeing 529s marketed much the way mutual funds are marketed. An individual can go through their agent, who gets paid for her advice through a commission.”

The fee structure for brokers is expected to improve as well, Stack says. Currently, a broker typically gets paid from a load charge of about 3.5% on contributions.

“Currently Putnam pays brokers from a 3.5% (load), but I believe others will be offering products that will pay the advisor more,” Stack says. The fee structure will be “more like the prevalent practice under the mutual fund industry,” Stack says. “It would maybe go to 5.5% from 3.5%.”

Section 529 is federal legislation; however, each state is responsible for its own plan and can either manage the assets itself or hire a vendor to do so.

Most states allow anyone, not just residents, to participate in its plan. Since each state can modify its version of the federal plan, it behooves agents eyeing this market to familiarize themselves with the options available to their clients, Stack says.

Some states make contributions to an account if a student attends a college in that state and the account has been open a certain number of years.

Some states allow any participant, regardless of income, to take a deduction off state taxable income.

Because each state has a unique plan, its important for an agent to, “at a minimum, be aware of what theyre providing and any glitches in the program,” Stack says. “Many times those states offer unique features it may be in the clients best interest to participate in.”

Agents interested in offering the 529 plan should be aware of the risk tolerance of their clients, Stack says.

“Its important to keep in mind that even though youre able to roll over once a year, youre still not able to direct the investment, so you want to be sure that once that contribution is made, it fits within that persons risk tolerance and particulars that may be unique to that client,” Stack says.

“For example, that client may have been using a whole life policy as a means of funding a college education. Thats low risk. They may want to pursue a 100% equity custom portfolio.”

Most 529 investment vehicles are age-based, “evolving” portfolios, designed so that the level of investment risk diminishes with time. More of the account assets shift into a bond- or money market-type portfolio as the child nears college age, Stack says.

But some states offer portfolios that invest 100% of account assets in equity mutual funds, Stack says.

An agent should also know when the money is going to be needed. A son might go to college when hes older than the typical college age, or a grandparent might be interested in funding a law school career for a grandddaughter.

An insurance agent who requested anonymity says he needs to know about 529 plans, no matter what the commissions are, because his clients want to hear more about the plans.

“Im finding that some clients have already bought them through mutual fund companies, so its a little frustrating,” the agent says. “I can sell stocks and mutual funds, but if people are calling a no-load mutual fund company and asking for a section 529 plan, its short-sighted for people like me to say I dont want that business.

“If another broker comes in and sells a 529 plan, whats going to stop them from coming in and taking the insurance sale as well?”

Reproduced from National Underwriter Life & Health/Financial Services Edition, June 29, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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