529 Plans in the Crosshairs

To virtually no one's surprise, regulators have begun scrutinizing how 529 plans are peddled. In December, the SEC and NASD sent a letter of inquiry to Edward Jones and American Funds, requesting information on how those firms sell the college-savings plans. Though the firms aren't being accused of any wrongdoing, the message was clear. They're going after it now, says 529 plan expert Joseph Hurley,

To virtually no one's surprise, regulators have begun scrutinizing how 529 plans are peddled.

In December, the SEC and NASD sent a letter of inquiry to Edward Jones and American Funds, requesting information on how those firms sell the college-savings plans. Though the firms aren't being accused of any wrongdoing, the message was clear.

“They're going after it now,” says 529 plan expert Joseph Hurley, creator of the Web site savingforcollege.com. He adds that compliance officers at broker/dealers have launched a frenzy of activity “to make sure they have the proper suitability procedures and their brokers are using 529s properly.”

According to an SEC source, both firms — neither of which returned calls seeking comment — are cooperating and are not suspected of “egregious” wrongdoing. But the breadth of the inquiry, along with previous concerns voiced by regulators, illustrates that in 2005 the spotlight will be on these tax-advantaged vehicles. The 529 plans had $45 billion in assets as of the third quarter of 2004, but they have come under fire for their high fees and for how 529 plans can vary from state to state.

The SEC is asking American and Edward Jones for “everything related to everything,” says the SEC source, ranging from advisor compensation to fees charged to clients to suitability (whether reps are placing clients into the best plans and funds). According to Financial Research Corp., American Funds is the dominant 529 player, managing $7.76 billion in 529 assets and 75 percent of plans.

“There are tons of changes coming, and (advisors) have to be ready,” Hurley says.

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