How the Pension Bill Will “Kick-Start” 529 Sales

For most financial advisors, the 529 College Savings has never been an easy sell or a big moneymaker. But, in the past six weeks, Bradley Pace, president of Pace Capital Management, says he’s had about 70 potential clients fill out applications for 529 plans following his seminars. “That’s more than I typically do in a year,” he says. He has also opened new 529 plans for his two daughters, he says.

For most financial advisors, the 529 College Savings has never been an easy sell or a big moneymaker. But, in the past six weeks, Bradley Pace, president of Pace Capital Management, says he’s had about 70 potential clients fill out applications for 529 plans following his seminars. “That’s more than I typically do in a year,” he says. He has also opened new 529 plans for his two daughters, he says.

Why the sudden enthusiasm for 529s? It has to do with new Pension Protection Act (PPA), which passed Congress in mid-August and, among other things, made permanent the tax-free treatment of money withdrawn from 529 plans for qualifying education expenses. These tax benefits were otherwise set to expire in 2010. “That removed a huge gray cloud” hanging over the plans, says Pace, who has been recommending 529 plans to clients for 10 years.

Apparently, word has spread quickly to potential clients. A survey from Fidelity Investments, released on Oct. 2, showed that over half—54 percent—of parents with children 10 years of age or younger who do not currently own a 529 account are more likely to open one now, due to the legislation. In addition, more than one-third of parents (36 percent) who already own a 529 plan say they are now more likely to increase the amount they contribute to existing 529 plans. And almost one out of 10 (9 percent) say they recently opened a new 529 account as a direct result of the permanency provision.

“You can expect the pension bill to kick start 529s again,” says Brian Boswell, a research analyst with Financial Research Corp. (FRC). “Absolutely, there was a major deterrent for advisors going into the sale with the 2010 sunset there. It was a piece of disclosure you had to make upfront to the client. It’s almost self-defeating to go into that sale saying the benefits are going to expire in a few years,” he says. “Plus, usually these are not big volume sellers. They’re an extra-ticket item. But I think you’ll see more people looking at them now that they can advertise and market them more effectively.” While parents can invest directly in the plans, an estimated 80 percent of new 529 sales went through a financial advisor or broker in 2005, according to FRC.

Assets in 529s—named for a section of the federal tax code—have grown steadily since 2001, when a tax law provided that money withdrawn from the accounts to pay for higher-education expenses would be free from federal income tax. But growth in new investments in the plans slowed in 2004, FRC data shows, due to concern over whether that tax benefit would sunset in 2011. Total assets stood at $77.3 billion at the end of the second quarter, up from $9.2 billion in 2001, says FRC. The Boston-based research firm expects assets to nearly triple by the end of 2011, to $257.7 billion.

“In most cases it is the best vehicle for college savings,” says Eric Freckman, a financial advisor and CFP with Guillaume & Freckman in Inverness, Ill. The only time the 529 is not a great bet is when there is a significant chance for a large financial-aid grant, say for a special needs child or a gifted child, Freckman says, because assets in a 529 plan can offset that aid. But those considerations may not be relevant to the families who have sufficient resources to work with a financial advisor.

Historically, the biggest drawbacks to 529 plans were high fees and limited investment choices. Again, there has been progress as states pressure plan providers to cut fees and provide more options. Earlier this year, for example, TIAA-CREF lost California’s 529 contract after it was outbid by Fidelity Investments, which offered reduced fees, more investment choices and better marketing. Some plans, like Missouri, have begun offering baskets of ETFs; others, like Ohio, have begun offering CDs—particularly appealing to families with children closer to college age.

A handful of plans have also added credit cards with 529 rebates or other matching perks, like Vanguard’s Upromise credit card; TIAA Cref’s Future Trust College Savings Program, a partnership with maternity-apparel retailer Mothers Work; and Fidelity’s 529 College Rewards credit card. The state of Kansas and its 529 provider American Century Investments have also sponsored a credit card called BabyMint, which offers rebates of up to 30 percent to be contributed into any 529 college savings plan.

These extras can’t hurt. “The biggest problem I find is that people are just afraid to start,” says Pace.

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