529 industry targeting grandparents’ IRAs

Jan 15, 2007 @ 12:01 am

By Charles Paikert

NEW YORK — Grandparents are poised to become the new growth market for Section 529 plans.

Program managers who run the college savings plans increasingly are encouraging financial advisers to boost sales by targeting those grandparents above or approaching age 70½, when they are required to start taking money out of their individual retirement accounts.

“This group has really become a key market, especially if they are affluent and don’t need the cash from their withdrawal,” said Larry Littler, senior vice president of the Wood Logan division of Boston-based John Hancock Financial Services Inc., which oversees marketing and distribution for the nationally sold John Hancock Freedom 529 Plan.

“For advisers, it’s a good ‘ask,’” he said. “They’re going to have to start proposing options for what to do with the money anyway, because otherwise, the money will leave the practice. And 529s happen to be a very good wealth transfer vehicle.”

According to a report issued last week by the Washington-based Employee Benefit Research Institute, IRA assets reached a record high of $3.67 trillion in 2005 and will be the single largest source of retirement assets — outside of Social Security — for private-sector workers.

“We’re hearing from affluent clients that they may not have a need for the required minimum distribution they’re being forced to withdraw,” said Diana Scott, a senior vice president at John Hancock and general manager of its college savings division. “They don’t need the income, they’re wondering where to put it, and we’re telling them to take a look at a 529 plan.”

Appeal to emotions

“It’s definitely a big target market,” said Joseph Casey, certified college planning specialist and owner of College Planner LLC in Walnut Creek, Calif. “There’s a lot of wealthy grandparents out there, and this sounds like a nice gifting strategy that also helps their estate planning.”

Program managers point out that college savings plans allow grandparents to have money in a tax-deferred account that they control, including being able to change the beneficiaries if and when they want to.

Grandparents, marketers add, also have the option of using the money themselves — to pay for courses that can range from traditional academic ones to more recreational pursuits such as cooking classes or golf instruction.

And many states allow 529 plan contributions to be used as a state tax deduction, reducing grandparents’ state tax liability.

Targeting grandparents for 529s starts with appealing to emotions, not dollars and cents, argued Bill Raynor, vice president of college savings plans for New York-based OppenheimerFunds Inc. and vice chairman of the College Savings Foundation, a Washington-based industry trade group.

“What do grandparents like to talk about most? Their grandchildren, of course. So for starters, you have a warm and fuzzy group hug,” Mr. Raynor said.

“Advisers also get the money back on their book of business, and the 529 can be positioned as an estate-planning tool, because technically, the money is out of the estate, although the grandparents retain control of the assets,” he said. “And through grandparents, advisers also have an opportunity to contact other members of the family,” Mr. Raynor added.

Sunset provisions

In the wake of the Pension Protection Act of 2006, which made 529 plan tax breaks permanent, a number of program managers have begun to include references to grandparents in their marketing material.

After the act was passed, TIAA-CREF “reworked” its marketing materials to “further encourage those — grandparents included — who had been hesitant to invest due to the sunset provisions,” said Chris Lynch, director of the New York-based company’s education savings department.

OppenheimerFunds now in-

cludes information about required minimum deductions in all of its sales presentations to advisers and also distributes a one-page marketing sheet titled “Next Big Idea” that details the benefits of marketing 529 plans to grandparents, Mr. Raynor said.

John Hancock also has begun to focus marketing efforts on “affluent grandparents with extra liquidity” and predicted that other financial service companies managing 529 plans soon will do the same.

To date, the concept generally has been well received by industry observers and advisers.

“It’s a very creative strategy,” said Andrea Feirstein, managing member of New York-based AKF Consulting LLC. “It’s exactly the kind of forward-thinking advice an adviser should be providing.”

“It’s an opportunity a lot of people haven’t thought of,” said K.C. Dempster, director of program development for College Money, an educational consulting firm in Marlton, N.J. “If grandparents don’t need the money to live on, they’re more likely to want, and be able, to help with their grandchildren’s college education anyway.”

Certified college planning specialist Brian Greenberg, owner of Greenberg & Associates LLC in Marlton, said that targeting grandparents for 529 sales is a “good concept” that gives grandparents an incentive to help both their grandchildren and their own estate planning.

But Michael Steiner, a certified financial planner and partner in Chatham, N.J.-based RegentAtlantic Capital LLC, who runs a fee-only practice, disagrees.

“It reeks of a sales pitch,” he said.


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