Saving for college has become a cottage industry. There are now over 80 varieties of the Section 529 plan alone. The result is a complex maze of investment options, cost structures, tax benefits and financial aid implications. The federal government's attention to the complexities has some thinking that there might be significant changes on the way.The National Association of Securities Dealers is currently looking into the sales practices of some 20 brokers, questioning whether these brokers are actually presenting the plans that best suit each client's needs.
Rick Hill, CFP, the in-house college savings expert for Buckingham Asset Management, in St. Louis, Mo., and the other investment advisors at BAM recommend 529s in limited situations. "We're looking for investment options with low fees," said Hill. "The great majority of these plans are broker-sold, and often they're pushing plans from certain states because they receive the commissions."
Hill also shares his research with the CPAs using BAM Services to offer financial advice to their clients. "We don't do a lot of 529s and we often don't even charge for them," said Hill. "We find a good option in the low-cost Vanguard states, and Utah has a good program."
The level of fees is a deterrent for many investment advisors. Hill targets plans with no higher than a 1 percent fee. Some states charge as high as 2.5 percent. And while fees have been coming down, the ease of comparison of fees among plans is still a challenge.
The complexity presents a high hurdle to advisors. The definition of fees varies from plan to plan, and the disclosures are far from standardized. "These plans are poorly regulated," said Hill. "We have to dig deep into the documentation just to find out what the fees are."
The attention from federal regulators might result in clearer disclosures. The industry has responded with plans to identify disclosure principles that would facilitate apples-to-apples comparisons between plans. The National Association of State Treasurers and its affiliate, the College Savings Plans Network, recently completed the first stage of a project begun last year to standardize disclosures, as well as definitions of fees. Some providers are making changes even in advance of industry guidelines.
According to Brenda Griebert, regional director of educational savings programs at TIAA-CREF, in New York, the large 529 provider recently changed all the booklets for their 12 different programs to allow easy comparisons.
Costs are varied, but other characteristics are equally complex, according to advisors. Each state has its own plan, there are often multiple vendors involved within a state, and the tax treatment of the 529 plans vary widely.
"These are complicated plans with multiple options," said Joseph F. Hurley, CPA, the chief executive and founder of Savingforcollege.com LLC, in Pittsford, N.Y. "Tax preparers are kept very busy tracking things like the out-of-state adjustments, qualified expenditures for withdrawals, and balancing out withdrawals with things like the HOPE credit."
The picture for vendors is similarly chaotic. The mutual fund scandals in mid-2003 prompted some states to drop troubled managers or add options for account holders. Also, some vendors are giving up. "It's hard to make money with these accounts," said Hurley.
Hurley added that even some states could exit the business. Wyoming, for instance, addresses a small populace, charges in the higher end of fees, and has no state tax off which to grant additional benefits.
Despite the challenges to making money, new providers like Vanguard and, most recently, Santa Monica, Calif.-based DFA, have entered the market. Low-cost TIAA-CREF is solidly committed to their college savings offerings. "We started out thinking that the big accounts would be sufficient to balance off the high numbers of smaller accounts," said Griebert. "But that hasn't happened. Providers struggle with large numbers of the small accounts."
TIAA-CREF investors start with as little as $25; some providers require larger deposits in the thousands. TIAA-CREF's solution is to educate parents and grandparents about the need to save for college. "We educate savers about the true cost of college, that they might start small but should have continual savings into the accounts," said Griebert. "We're seeing a proliferation of calculators on state as well as industry Web sites that help parents determine their ultimate goal of how much college they will pay for, and then how to save to meet the goal."
Don't look for federal agencies or Congress to take over the plans from the states, however. What was developed at the federal level was the Coverdell Savings Accounts, with minimal annual contribution caps and income and age restrictions.
"What the states developed was accessible and powerful because the plans helped every family save for college," says Hurley. "I certainly don't think Congress would create a self-directed plan that would allow $300,000 contributions."
The federal government will probably be satisfied to govern federal tax laws, plus add some rules about how to live with the plans. Fees could become standardized under Securities and Exchange Commission and NASD pressure. Hurley thinks that state tax parity between residents and non-residents might be in the offing.
But the desire on the part of the states to tailor a plan for their citizens means job security for specialists. "It's only because this field is so complicated that I do what I do," says Hurley. "The demand for my services just keeps growing."
