Affluent households ignore 529 plans, study says

Despite tax breaks, report says the market is under-penetrated

Jun 14, 2009 @ 12:01 am

By Charles Paikert

Two-thirds of affluent parents with children under 18 aren't using Section 529 college savings plans, according to a report by The Phoenix Cos. Inc. “Clearly, the high-net-worth market is under-penetrated when it comes to 529 plans,” according to the report, “Saving for College: Another Challenge Facing the High-Net-Worth.” “I was really surprised at the extent to which the high-net-worth segment is not using 529 plans,” said Walter Zultowski, senior vice president of research and concept development for Hartford, Conn.-based Phoenix and author of the report. “529s should be a no-brainer for them.” More than 1,700 individuals living in households with a net worth of at least $1 million, excluding their primary residence, participated in the online survey, which was conducted in February by Harris Interactive Inc. of Rochester, N.Y. The report was released last month. Industry executives and financial advisers also said that they were startled by the report's findings. “It is disheartening,” said Jeff Coghan, assistant vice president and director of 529 plans for The Hartford (Conn.) Financial Services Group Inc. “We are still early in the life cycle of this product, compared to 401(k)s, and it takes a while to penetrate the market, but this shows we're clearly not there yet.” One adviser has enjoyed success in using 529 plans with her affluent clients.

“I would think that 529s would be part of financial planning for affluent parents, especially with the tax benefits,” said JoLynn Free, senior vice president and financial consultant in Austin, Texas, for RBC Wealth Management of Minneapolis. “We certainly recommend them, and as a vehicle, I've found them to be solid gold.”

Meanwhile, Mr. Zultowski speculated that one reason that affluent parents haven't used 529 plans is lack of interest among advisers.

Although some advisers have been known to be less than enthusiastic about selling 529 plans because of the relatively low commissions the plans generate, Mr. Coghan said that 529 program managers have been working closely with advisers to explain the overall benefits of the plans for their practices.

“If you're positioning yourself as helping someone arrive at a comprehensive financial plan, but you're not including college costs in that plan, you're doing the client a disservice,” he said.

To facilitate that kind of planning, Mr. Coghan said, The Hartford last month introduced a web tool to help parents calculate college costs and how much they will need to save.

The Hartford will focus its marketing efforts on its stable-value fund this year in an effort to increase awareness for its adviser-sold West Virginia SMART529 plan and “spur new account openings,” he said.

In addition to the tax benefits of 529 plans, Ms. Free said that affluent clients like the fact that parents, not children, remain owners of the account. What's more, 529 accounts appeal to high-net-worth parents and grandparents because they can easily transfer cash into a tax-protected account, she added.

One way to spur 529 sales among affluent parents, the Phoenix report recommended, would be to “develop innovative hybrid products which combine elements from both the insurance and investment worlds.”

Such a product, Mr. Zultowski said, might be “similar to guaranteed features being offered in annuities.”

Just as an annuity may offer a guaranteed minimum account benefit, he said, a 529 plan might consider offering a wrap-managed- money product with a guarantee feature.

“It's an attractive idea, but the execution would be extremely difficult,” Mr. Coghan said.

“In a retirement product, you have a distribution time frame of approximately 30 years,” he said. “But for a college product, the payout is only four years, and it would be difficult to execute the guaranteed income.”

E-mail Charles Paikert at cpaikert@investmentnews.com.

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