Advisers want sprinkles on plain-vanilla 529s

Mar 6, 2011 @ 12:01 am

By Liz Skinner

When it comes to Section 529 college savings plans, financial advisers say they wish they had more choices.

Advisers like and recommend the plans —about 67% of the 480 advisers responding to an InvestmentNews survey in February said they recommend the funding vehicle to clients — but feel hamstrung by their investment alternatives.

Of advisers who don't recommend the plans, 68.5% said the biggest reason they don't is that they prefer other investment vehicles. About 55% said they don't like the restrictions — the “red tape” associated with opening accounts or the investment choices available within the plans. (Download the complete set of findings from the InvestmentNews 529 survey.)

Advisers could choose more than one reason in the survey.

With 529 plans, earnings grow tax-free and withdrawals are tax-free as long as the funds are used for educational expenses, such as tuition, room and board, and books. Additionally, many states offer further tax breaks.

More than half of advisers said they think 529 program managers could do a better job in helping them promote the plans. Of those, 65% want easier-to-understand marketing materials, 56% would like more investment choice within the plans and 51% want 529 training sessions and regular updates.

When advisers were asked what are the most important factors to consider when evaluating 529 plans, investment performance was the most frequent response, followed by investment choices. Fees and expenses, and the quality of the fund company or program manager, also are important to advisers.

Notwithstanding their criticisms , advisers generated about 39% of net contributions to 529 plans in the fourth quarter, accordng to Paul Curley a research analyst at Financial Research Corp.

“That's up from 36% a year earlier, which shows the extent to which 529 plans are increasingly adviser-sold,” he said.

Speaking at the annual meeting of the College Savings Foundation in San Diego last week, Mr. Curley said that total 529 plan assets rose to an estimated $138 billion in the fourth quarter of 2010, an 8.2% increase from $128 billion in the third quarter. Plan assets rose 18.1% last year, and inflows set a record.

“Typically {529 plans] make sense up to a certain level,” said Grant Moore, a financial adviser with Savant Capital Management Inc., which manages $2 billion in assets.

If plans allowed for investment in more asset classes, he would be more likely to recommend them, he said.

Mr. Moore advises about 60% of his clients who are parents or grandparents to invest in a 529 plan. For parent clients, he said, he recommends that they save about half of what they expect to need for college expenses in 529 plans and keep the rest in accounts that don't have to be used for education expenses.

“They're a no-brainer for clients with grandkids [if they] have a large asset base and the desire to do it,” Mr. Moore said.

Lyn Dippel, a financial adviser with Financial Advantage Inc., which manages about $280 million in assets, said that 529 plans are “fine” for small investments of, say, $20,000.

“But if you have $100,000 to $200,000 to put in, you want more sophistication in your investment strategy,” she said. “529s are just plain-vanilla.”

Ms. Dippel said that she recommends them mostly for grandparents who are looking for tax-efficient ways to transfer wealth.

The limited investment choices, lack of alternative-investment asset portfolios, and restrictions on the educational expenses that the funds can cover are reasons that she gives for skipping the plans that much of America has embraced.

That said, program managers are adding more investment choices to their adviser-sold plans, said Mr. Curley, who noted that asset-flows into 529 plans (up 66%) outpaced flows into retirement plans (up 20%).

Investments in age-based portfolios dominated the net contributions in the fourth quarter, especially in direct plans, he said. Such investments, which become increasingly conservative as the beneficiary nears college age, are even a hit with President Barack Obama.

According to his public financial disclosure report signed in May, the Obamas have between $100,001 and $250,000 saved for each of their two daughters in age-based portfolios within the Illinois Bright Directions College Savings 529 plan.

The report doesn't reveal in which investments the money was placed.

In general, fees associated with 529 plans are falling, observers said.

“Plans are starting to get big enough that they can bring those fees down,” said Betty Lochner, director of the state of Washington's Guaranteed Education Tuition plan and a member of the College Savings Plans Network's board.

For instance, in December the Connecticut Higher Education Trust (CHET) cut the 529 program management fee by 39%, bringing the plan's total asset-based expense ratio to between 0.34% and 0.98%.

Fees in 529 plans also were cut in Alaska, Iowa, Maryland, Michigan, Nevada, Pennsylvania, Virginia and other states last year.

The largest 529 plan is Virginia's CollegeAmerica plan, administered by American Funds. It has about $26 billion in assets.


The problem with most 529s is that when you look at the return on investment since inception, few beat the rising costs of college tuition, which are far outpacing inflation, said John Epeneter, a financial adviser with Care Asset Management and Strategies Inc.

He is also put off by strict limitations on how assets in 529 plans may be used.

Of course, Congress would have to address any proposed change in the education expenses covered by 529 plans.

Legislation that Rep. Lynn Jenkins, R-Kan., and Rep. Ron Kind, D-Wis., introduced last month would make permanent the allowance for computer technology used by the student. It also stipulates that computer games aren't eligible expenses.

E-mail Liz Skinner at


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