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August 15, 2005 at 08:00 PM
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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, savingforcollege.com, 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.
