Twenty years after Section 529 plans were created to help families save tax-free for the high costs of college, the industry is poised to welcome a new player: the robo-adviser.
Digital advice providers are predicted to be the next platform that states bring on to offer Americans the college savings plans, according to a new report analyzing the 529 market.
“We think investment advisers will want to use this with clients as well as savvy investors themselves,” said Andrea Feirstein, managing director of AKF Consulting Group, which authored the report.
Investment advice produced by computer algorithms is popular already for retirement savings, but it's only now being incorporated for college funds. It is expected to gain prominence in the near future, the report said.
As robo-advisers become an accepted distribution channel for 529 college plans, the accountholders to whom they will likely appeal will be a welcome new source of investors, Ms. Feirstein said.
“It will attract new, younger investors who value quantitatively driven solutions at low cost,” she said.
In the overall 529 market today, about 12.5 million accounts hold about $253 billion in assets, according to the College Savings Plans Network. Funds in 529 plans, named by the section of the Internal Revenue Service code that created them, can be used for most college expenses without owing taxes on investment gains.
The biggest foray a robo-adviser has made into the 529 market so far has come from BlackRock's FutureAdvisor, which offers free 529s and Coverdell Educational Savings Accounts for its clients.
The AKF Consulting Group report also found that the number of 529 plans available has fallen to 90 from a high of 93 in March 2012.
Overall, there have not been significant changes to the type of investments offered in those plans over the past 16 months, since the consulting firm's last market report.
The report mentioned that a handful of adviser-sold 529 plans, including Connecticut, West Virginia and South Carolina, are putting to work yield-seeking strategies.