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Financial Planning > College Planning > 529 Plans

NASD Investigating Some 529 Plans

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Do 529 college savings plans need reform?

The National Association of Securities Dealers is investigating 20 broker-sold 529 funds that have made at least 90% of their sales to nonresidents. In addition to the fact that none provide tax breaks that in-state plans offer, most of the plans being probed by regulators charge high expenses.

Sales practices for 529 plans also are being investigated by the Securities and Exchange Commission and, because most 529s consist largely of bonds, by the Municipal Securities Rulemaking Board.

A recent study by two professors at the University of North Carolina at Wilmington suggests the reason for the regulators attention: Many investors are buying plans that offer no state tax advantages.

States that offer the highest tax deductions for in-state investors have the fewest participants and the lowest total assets, when state population and other factors are considered, the UNC study found.

In addition, many advisors are directing investors to 529 plans that charge high fees to the buyer. The study showed that 529 plans with higher fees have more accounts and more assets under management than less costly plans.

Those results are “contrary to logic,” says Raquel Meyer Alexander, a professor with UNC Wilmingtons accounting and law department, who co-authored the study with LeAnn Luna, another professor from the same department.

To protect themselves from potential liability for failing to serve clients best interests, advisors selling 529 plans should show the client the in-state plan first, if it offers a tax deduction or other incentives such as a freeze on tuition increases, suggests Alexander.

“Also, they should tell clients how they get paid,” she adds. “And help them understand load and no-load options.”

The 529s, she says, “are great products. But advisors need to make sure they recommend ones that are best suited for their clients.”

Joseph Hurley, senior partner, Bonadio & Co., Pittsford, N.Y., and founder of the Web site,, says many advisors sell national 529 plans that dont offer residents of a particular state an opportunity for a local tax deduction. Such plans are sold largely through brokers, and have high costs for the simple reason that “broker-sold plans are sold more effectively,” he says.

Thomas Leahy, vice president of Deckert Leahy Inc., an investment advisory firm in Richmond, Va., notes, too, that 529s may not always be the most suitable way to save for a childs education.

A prime consideration, he says, is: Would a 529 affect the individuals eligibility for financial aid?

“If you havent established that the client would need aid, a 529 is prudent,” Leahy explains. “But if there is a need-based eligibility established, then you might want to look at scenarios that dont affect aid.”

Alternatives might be educational, Roth or traditional IRAs, which allow the investor to take out funds for college costs without penalty.

To the fact that Deckert Leahy is fee based, and doesnt work on commission, helps keep it focused on the needs of the client, he says.

When he does recommend a 529 to a local client, Leahy usually emphasizes College America, Virginias no-load plan administered by American Funds Distributors Inc., a subsidiary of the Capital Group Companies Inc., Los Angeles.

But when looking at any fund, in or out of state, Leahy focuses mostly on those that can be tuned to the needs of the client in terms of investment risk and so on. He steers clear of what he calls “cookie cutter” 529s that allow limited choice.

Advisors should look also at what the clients circumstances would be at the time they send their child to college, Leahy suggests. That includes what their income level would be and how much college is likely to cost at the time.

Bruce Harrington, vice president and director of product development for MFS Investment Management Inc., Boston, says studies show 75% to 80% of 529 sales come through financial advisors. “Thats because they are a complicated product,” he says.

The advisors obligation is to make sure the investor understands what he is buying, he says.

For Harrington, the big story about 529 plans is their growth. Assets in 2004 in all plans stood at $52 billion, up almost 50% over 2003, he notes.

“The 529 is still in its infancy, so its a product that more and more investors are coming to advisors and asking about. If youre not talking to the client about 529s, someone else is.”

Reproduced from National Underwriter Edition, February 25, 2005. Copyright 2005 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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