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Assessing the 529 College Plan Market: Retirement Plan Advisor, September 2009

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In the aftermath of the financial crisis and in a recessionary environment, financing a college education might seem a far more daunting possibility than ever before for many Americans. President Obama wants the United States to lead the world in terms of the number of adults with college degrees by 2020, which in these times, might seem a difficult goal to achieve, but 529 plans are an excellent option for people wanting to be part of this goal, and they are also an area in which financial advisors can play an important role.

There are currently about $98.6 billion in assets invested in 529 plans, says Kevin McMullen, chair of the Washington, D.C.-based College Savings Foundation. Over the years, these plans have become increasingly attractive from a tax standpoint, but these are tough times and for most families, saving for college has taken a backseat over paying mortgages, saving for retirement, and dealing with day-to-day bills, he says. Financial advisors–who have both the ability and the resources–therefore need to work with parents and make them understand the importance of saving for college even in a tough economic environment.

“The concern we have is that parents are saving less and willing to rely more on debt to finance their children’s’ education,” McMullen says. “Parents want their children to go to college but they are relying more on grants, aid and student loans, and the percentage of parents willing to take on loans in their name to fund their kids’ college education has also increased.”

A financial advisor can really help in expressing the importance of setting aside funds for college, McMullen says, and coming up with the correct savings plan as well as the appropriate asset allocation for a particular family looking to finance a higher education.

The 529 plan is under the regulatory spotlight and many, such as Joan Marshall, executive director of the College Savings Plan of Maryland, are hoping that Congress will pass HR 1351, a bill that would, among others, make permanent families’ ability to change their plan investment options twice in a calendar year instead of once. The Treasury department has also issued a report with recommendations aimed at promoting the uptake of 529 plans. While agencies like the College Savings Plans Network (CSPN), an affiliate of the National Association of State Treasurers (NAST), agree with the Treasury’s recommendations, the one issue where there is a difference of opinion is the elimination of the “Home-State Bias,” through which states attach special tax benefits to their own 529 plans for their own residents, such as a state tax deduction for contributions to the home-state plan.

“CSPN and NAST believe that all decisions on a state’s tax policy with regard to investments in a 529 plan should be left to the individual state,” CSPN stated in a release. “The suggestion that offering state tax deductions to out-of-state plans would lead to lower fees simply misses the point that 529 plan fees have been reduced significantly over the past few years and are already nearly equal to or lower than 401(k) plan fees.”

Overall, though, all parties involved are keen to see a broader usage of the 529 plan, so increasing awareness is by far the most important thing, Marshall says.

“All states work very hard to extend the broadness of these plans, but the more families become aware of this, the more likely they are to save,” she says.

While there is a plethora of Web sites providing information to individuals on 529 plans, advisors can be greatly served by using FundPoint Data, a tool recently launched by NewRiver Inc. The product brings together information on all 99 529 plans currently available, says Von Duran, senior product manager at the Andover, Massachusetts-based firm, in an all inclusive, single source desktop solution, which enables financial advisors to perform real-time, plan-to-plan comparisons; conduct share class suitability analysis and communicate breakpoints to customers. Advisors can also provide point-of-sale disclosure and instantly calculate all tax advantages, fees, and commissions using the tool.

Financial advisors are keen on being in the 529 space because these plans are part of a complete financial planning offering, which they say is helpful when retaining an investor’s business, Duran says. Individuals can easily purchase 529 plans on their own, but with NewRiver’s tool, advisors can really compare plans in detail, in order to come up with the best options for their clients.

“Before this, there wasn’t a standardized format for information, so if an advisor had a plan in Virginia and another for California, there would be documents everywhere,” Duran says. “We have normalized the data and put it in the same place for all the plans, thereby tackling the issue of standardization.”

Duran expects that more and more advisors will become interested in doing business in the 529 space going forward. As these plans become more attractive from a taxation standpoint, competition between different plans is also heating up, he says, and providers are adding new features, lowering their fees, and upgrading investor benefits.

NewRiver updates its FundPoint Data product every night to reflect changes, Duran says, so that advisors have immediate access to up-to-the minute information.