States working on new savings accounts for disabled families

Chairman of the College Savings Plans Network discusses coming ABLE plans, college 529s and why prepaid plans can be 'dangerous'

Feb 29, 2016 @ 1:25 pm

By Liz Skinner

Alabama's treasurer Young Boozer took up the chairmanship of the College Savings Plans Network at the start of the year, just as he and other state officials were trying to deliver a new tax-advantaged savings plan for disabled children.

Mr. Boozer said at least some ABLE 529 plans — which were birthed out of the same Internal Revenue Service rules that crafted 529 college savings plans decades ago — are likely to hit the market by the start of 2017.

He hopes these savings plans will be as effective for helping families cover the expenses of caring for their disabled children — everything from medicine to equipment that helps with mobility — as 529 college plans have been helping parents pay higher education costs. About $258 billion are saved in the nation's 529 college plans.

In an interview with InvestmentNews, Mr. Boozer outlined the newest changes CSPN is seeking from Congress going forward.

Q: What new trends are you seeing with 529s?

A: People who are operating the plans and the program administrators are still looking to reduce fees. That is incredibly important when looking at return over a long period of time, because you're not paying it out and because of the compounding effect over 18, even 22 years. People also are paying much greater attention to the investments being offered and their performance, and taking action to correct any deficiencies.

Another continuing trend that is accelerating, is making the glide-path smoother, making it easier to predict and trying to eliminate those large declines or changes in asset allocation so that you avoid any dislocations.

Q: Are you seeing more growth with direct-sold plans or the 529s sold through advisers?

A: In Alabama our direct-sold plan has grown more rapidly, and I think that is happening around the country as people are getting more comfortable with opening accounts online and managing and investing online.

Q: What's the difference in cost of the two types of plans?

A: Of course, it depends on what plan and investments your adviser puts you into, but in Alabama you'd be at about 20 to 25 basis points less expensive with the direct sold plan, just in terms of the fees.

Q: In Alabama you closed your prepaid college savings plan to new investors in 2009 over financial solvency issues, and investors had to settle for partial payments instead of full tuition. What did the experience teach you about prepaid plans?

A: Prepaid plans can be flawed, and most likely they are because the contract is between the buyer and the state. As the state, I invest that money and say I'm going to pay the school over here 18 years from now. But I have no contract with and no control over that school; it's a third party. It seems financially dangerous to be in a position where one has an agreement but no control over this entity, and the buyer doesn't either.

Q: Are all prepaid plans doomed?

A: With some programs around the country, there is some type of contract or understanding with the schools. Otherwise, it's tenuous at best. Some prepaid plans have the full faith and credit of the state, which lessens the risk. The others are going to struggle.

(More: 529 plan tricks and traps)

Q: What was the downfall for Alabama's prepaid plan?

A: The markets in 2001 did the initial damage and there wasn't enough time for it to recover when 2008 came along. It got into a situation where it was not going to be able to fulfill the original bargain that had been set. We struck a deal in mediation and we took the assets we had left and calculated how much we were going to get from the Alabama legislature, and said, 'This is what we have and this is what we are going to pay out to people who still have contracts.' We gave them a fixed payment and said if you stay in the program, you get 2010 tuition and fees from now on. It allowed us to lock down both sides. There were people upset and it's totally understandable.

Q: Congress approved several changes to 529 plan rules at the end of 2014 that CSPN supported. What will CSPN ask for next?

A: We are asking to have $35,000 of the assets in 529 accounts held by parents from counting as parental assets in setting a family's expected contribution to college costs. We also want to allow for the reporting of 529 plan assets held by grandparents or noncustodial parents as parental assets on federal financial aid forms and not count as income to the student in the following year when used toward eligible expenses.

Q: ABLE plans that offer tax-advantaged savings for children with disabilities were approved by Congress in December 2014 under the same Internal Revenue tax rules as 529 college plans. Why don't any states have them available yet?

A: CSPN has kind of taken the lead in getting it organized because of the state treasurers and agencies that handle 529s — a large number of them will also handle the ABLE account. We have done this before, but it is different with these. With college savings, we can envision where the process starts and ends, and what has to be done in the middle.

ABLE accounts are different. We envision more like a barbell. If a parent has a child with a disability, they may have some expenses immediately, so the account will be paying out a lot earlier on and look a lot like a checking account. It's a short-term investment with low interest rates and has some kind of fees associated with it. On the other side of the barbell, a parent has a child with Down syndrome and the parents can meet the child's needs today, but they want to put money away so those resources will grow, and when the child is on his or her own there will be something there for them. We are running through these concepts and numbers now to figure out how to design the plan so it works for all the people who are going to need it.

Q: What's been the reaction from product providers?

A: Most people think it will be a simplified list of investment options. So if I had a 529 account for college savings I may have 20 funds available, while with this you'll probably have fewer.

Q: So when will we see ABLE plans available to families as a financial planning tool?

A: Some states have targets for opening their accounts July 1, 2016, which is optimistic and aggressive. I think Florida is required by law to get it up and running by then. They could be first, or maybe Virginia. Nebraska was the first to put out an RFP. But at the end of last year one of the requirements in the law changed. Originally, the account had to be opened in the state where the beneficiary lived; it's called home-state requirement, which would mean every state would have to open a plan, though somebody else could operate it. But now it's not a requirement and everyone is doing a little rethinking about how this is going to work. In Alabama, our objective is to get ours up and running by Jan. 1, 2017.

Q: Will there be direct- and adviser-sold ABLE plans?

A: There could be. But once again you look at cost and the emphasis and I believe they will be mostly direct. Because while you are sensitive to cost on college savings, you will be more sensitive to cost on an ABLE account.

Q: What expenses can be covered with these ABLE plans?

A: It's very broad. It can be medicine and other health-related costs, equipment, special schools or training, rehabilitation, those kinds of things. There is not a list at this point in time.


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