College savings plans to lobby for unlimited investment changes

Supporters of 529 plans want tweaks to law that caps fund changes at two per year, which could spur adviser interest in managing them

Mar 10, 2016 @ 1:40 pm

By Liz Skinner

The college savings community is pushing Congress to tweak the 20-year-old legislation that created tax-advantaged 529 plans, to allow for unlimited investment changes.

Today account holders can make only two investment adjustments a year to the accounts, which allow investors to accumulate funds that can be tapped for college expenses without owing federal or state taxes on the growth.

Some believe the change could make the plans, which today contain about $258 billion, more attractive to financial advisers, because it would provide more justification for charging a management fee on those assets.

"For advisers it would be a monumental change," said Paul Curley, director of college plan research for Strategic Insight. "It would make 529s look like all other investments in terms of being able to make changes at any point."

Mary Morris, chair of the College Savings Foundation and chief executive of the Virginia529, said she believes investment changes were never meant to be restricted, but that the Treasury Department misinterpreted the legislative language in the proposed rule.

"There's no value in restricting people from reallocating within their limited number of investment options," she said.

The significance of the change to advisers would depend on how they charge clients.

Financial adviser Carolyn McClanahan said it wouldn't actually matter to her firm, Life Planning Partners, which charges a flat annual fee to clients. She also wonders why anyone would need to make "bunches of changes" to investments in the plans.

The proposal is part of the legislative agenda the College Savings Foundation will push this year and in future years, as explained at the foundation's annual conference in Ocean Beach, Fla., Wednesday and Thursday.

(More: 529 plan tricks and traps)

The foundation also wants to encourage more employers to be involved in helping families save for college in 529s, and allow money saved in 529 plans to be rolled over to tax-advantaged retirement accounts after a certain number of years, Ms. Morris said.

Allowing rollovers would eliminate the argument of parents who don't want to invest with the plans because they worry their children won't attend college, or that they will put too much into the plans and have to pay a 10% penalty on the balance when taking it out, as well as pay taxes on investment gains.

The 529 legislation that created the college savings plans in 1996 has gone through a series of changes, most recently at the end of 2015 when computers were permanently added as a qualified college expense, and tuition refunds were allowed to be returned to the accounts.

The number of investment changes allowed was adjusted to two from one at the end of 2014, which is also when 529 ABLE accounts were created to provide for tax-advantaged savings accounts for young disabled family members.


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