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Financial Planning > College Planning > 529 Plans

Direct-Sold 529 Plans Coming to Advisor Market: Morningstar

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Direct-sold 529 plans are increasingly accessible to advisors as they shift from commission to fee-based compensation, according to a Morningstar study released Wednesday.

“Direct-sold plans recognize that the market is shifting and so they want to provide some of that customization and flexibility that was previously limited to advisor-sold plans,” said Madeline Hume, analyst with Morningstar in Chicago.

The latest 529 College Savings Plan Landscape study found that direct-sold plans accounted for 57% of total 529 plan assets at year-end 2018 compared with 43% for advisor-sold 529 plans, with fees declining at a slower pace for direct-sold plans than advisor-sold plans.

Morningstar’s top-rated plans include the state of Illinois’ Bright Start and Utah’s my529 in the direct-sold category, along with Illinois’ Bright Directions and American Funds’ CollegeAmerica in Virginia among advisor-sold plans.

Gina Bachism, senior lead advisor with Harmon Financial Advisors in Atlanta, prefers 529 plans that offer target date funds since they are structured to take into consideration the age of the child and time horizon.

“I like that as the child becomes older and approaches college, the fund increases its allocation to safer, low-risk investments,” Bachism told ThinkAdvisor. “The ease and functionality of automatic asset reallocation is a nice feature for a plan to offer.”

However, according to NEST 529 College Savings Plan‘s 2019 College Savings Survey, only 12% of national respondents said they plan to use a 529 college savings plan for their child’s education. The reasons cited for not investing in a 529 plan include being preoccupied with paying off current debt, the high cost of living and the use of other savings methods.

Edward J. Snyder, an advisor in Carmel, Indiana, persuades his clients to invest by reminding them of the 20% tax credit that the Indiana plan offers.

“I tell them it grows without tax and can be withdrawn without tax as long as they use if for higher education,” Snyder told ThinkAdvisor. “I tell them the most important factors are how much money they add and how early they add it.”

Snyder adds that if could devise his own 529 plan, he would increase investment options in large- and small-cap stocks as well as in international, real estate and bonds.

“I look for tax benefits, good investments options and low expenses,” he said.

As 529 plan assets and the industry gains in prominence, Hume expects more of these solutions to become available to a wider investor base; however, the offerings in an advisor-sold plans are currently more comprehensive.

For example, an advisor-sold plan could include an active equity fund, where direct-sold plans would only hold a passive index-tracking equity fund.

“Direct-sold plans can be a bit more paternalistic,” said Hume, author of the Morningstar report. “Advisor-sold plans might offer a balanced fund, and it’s common to see a multi-manager approach, whereas you might not see as much of that in direct-sold plans.”

The study further found that direct-sold plans assets grew 9.9% annually over the past five years while advisor-sold plans grew 4.4% annually.

“One element of the advisor-sold plans lagging behind their direct-sold counterparts is the higher fee hurdle that they are assessed,” said Hume, who estimates that fees for advisor-sold plans are some 60 basis points higher.

— Check out Best & Worst 529 College Savings Plans of 2018: Morningstar on ThinkAdvisor.


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