Few investment accounts divide financial advisors quite like 529 plans. Known primarily as a college savings account, the tax-advantaged plans’ purposes have since been expanded to include paying for certain K-12 education expenses, among other functions, but their usage is still confined to a minority of Americans. While familiarity is a hurdle to usage, it’s not the only factor. Some advisors and their clients think saving for college in a 529 won’t be worth the trouble, as college is likely to look vastly different in the future, while others consistently rank using them for college savings as a top priority.
The debate hasn’t stopped new entrants to the field. Morgan Stanley announced an “advisory 529 Plan” on Wednesday, the latest salvo in the firm’s goals-based investing approach. The financial services firm contracted with the North Carolina State Education Assistance Authority, which administers North Carolina’s 529 National College Savings Program, to make the plan available in the fall.
Morgan Stanley will be the plan's administrator, distributor and investment manager, available to clients without brokerage charges or commissions, but incurring an advisory wrap fee. Investment options will include 11 of the firm’s model portfolios invested in “Morgan Stanley Pathway Funds,” with both passive and active strategies.
In addition to an asset-based wrap fee, clients will pay fees associated with the model portfolios, which use third-party managers. Funds' net expense ratios range from 0.48% to 2.13%.
“It is the first fully-integrated 529 plan,” said David Rosen, head of traditional investment products at Morgan Stanley Investment Solutions. “The account leverages our UMA and our wealth management research.”
While North Carolina’s State Education Assistance Authority was bullish on “Morgan Stanley’s caliber” and the number of its financial advisors, not all are convinced 529s are what they're made out to be.
“I recommend the 529 to many clients but very few actually end up implementing it,” said Ron Strobel, a financial planner and founder of Retire Sensibly LLC in Nampa, Idaho. “We often use a brokerage account instead.”
That’s because even with a state income tax deduction for contributions, parents may still forgo a 529 plan and opt for a brokerage account instead because of its flexibility, he said. Brokerage accounts don't preclude clients from using assets for their own expenses or retirement—or gifting the money to their children for college or a down payment for a home.
“I think we will see a decrease in the use of 529 accounts, especially if colleges move to a cheaper and less appealing online-only environment,” he added. “The likelihood of children attending college may decrease, costs may decrease and the downsides of the 529 accounts may begin to outweigh their tax benefits.”
Plus, college in the future may not look the same as it does today.
“Traditional college is an institution that’s on its deathbed. The pandemic may have killed it off for good,” said Manish Khatta, president and CIO at Potomac Fund Management, a portfolio management service company in Miami. “The world is just going to look [so] much different in 20 years that I don’t think saving in a 529 is worth it anymore.”
But assuming college expenses, as they exist today, will change in a way that makes 529 accounts obsolete is “advice based on speculation,” said Jamie Lima, founder and president of Woodson Wealth Management in San Diego. “We have to work with the information we have at hand at the time and provide the most sound advice,” he added.
In nearly nine years at Fidelity Investments, Lima worked as a financial planner serving families who used 529 plans. During that time, he realized that “529 planning may not cover the month’s expenses, but [it] is a key driver of satisfaction in the relationship. What’s better than sending little Johnny to college and knowing that your retirement hasn’t been sacrificed?”
Moreover, conversations around 529 accounts can drive referrals, saving a firm money on prospecting costs, he said. He continues to offer advice around 529 accounts at his practice, which focuses on fee-only advice for HENRYs.
“I think 529 plans will still be around in 2030,” added Dan Herron, a financial planner at Elemental Wealth Advisors in San Luis Obispo, Calif. “Because college is still one of the biggest steps toward a high-paying career (and while classroom settings will likely be more virtual), I don’t see the price of college decreasing significantly anytime soon.”
Herron uses a monthly retainer to generate revenue and said “the focus isn’t really how lucrative it is, but rather how important it is to get a head start on college savings.”
Meanwhile, the complications of charging an investment management fee on a 529 account led Brian Jones, financial planner and founder of NextGen Financial Advice in Burnsville, Minn., to stop charging for 529 account management altogether. Instead he charges for "a college savings projection," and he expects to add financial aid planning services to his practice.
While he still manages and sets up the accounts, he noticed that they’re increasingly unpopular.
“When people want to save for their kids, I explain the pros and cons of the different account types,” he said, including 529s, UTMA custodial accounts or regular brokerage accounts. “Many people are becoming concerned about having their money locked up in 529s and their kids not going to college.”
Still, Morgan Stanley may be onto something, by building advice around 529 accounts.
Even if the financial models of post-secondary education evolve, 529s will have their place, said Ksenia Yudina, founder and CEO of UNest, a mobile app designed to make opening a 529 account easier. “We don’t expect a radical shift in the current education system model. Even if there is a move to a more public model, the need for 529s will not change.
“Our belief is that school will cost money,” reiterated Morgan Stanley's Rosen. “There will be a cost to attend a university, whether online or physical location. Flexibility of the 529 is a benefit.”
Anecdotally, advisors at Morgan Stanley were seeing an increased demand for 529 accounts, Rosen said, adding that financial advisors at the firm saw college savings as a challenge—one that a 529 account would help solve.
As advisors weigh the pros and cons of 529s with their clients, there's one point that's not up for debate: the timing of Morgan Stanley's announcement. In a tip of the hat to the calendar, the news was meant to line up with May 29—5/29—confirmed Katrina Clay, the firm’s spokesperson.