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How to Choose a 529 College Savings Plan and How Can We as RIAs Help?

As financial advisors and regular readers of Capstone’s college blog (or simply living and breathing), you know the price of college is soaring to record levels. To make this massive purchase, families are trying to save more and using 529 savings plans to do it. Although shockingly, only a third of families know what a 529 plan is.

Why are 529 plans so popular?

A 529 Plan is an education savings plan operated by a state or educational institution designed to help families set aside funds for future college. It is named after Section 529 of the Internal Revenue Code which created these types of savings plans in 1996. Funds invested in a 529 plan grow tax deferred and can then be accessed tax free as long as the funds are used for higher education expenses at any accredited institution anywhere in the world.

In addition, with the 2018 changes to the tax code, families can use 529 plans to finance K-12 private education. These tax changes open up a whole new spectrum of discussions between advisor and family. The focus of this post is how to find the right 529 for your client. (If you want more information on how the 529 works check out this post 11 secrets of 529 College Savings Plans.)

If you are part of a fee only RIA, as we are at Capstone Wealth Partners, our hands are tied to a certain extent when it comes to helping families with this financial investment option.

Lots of options for families

Families can buy a state sponsored 529 plan from ANY state in the US. Many families do not realize this fact. They think they are restricted to buying the state plan offered by their home state.

Sometimes, buying from their state plan is a good idea. Some states provide a tax deduction to residents who invest in that state’s 529 college savings plan. Ohio recently increased their available deduction from $2,000 to $4,000 per year. Families need to consider if their deduction will have a higher value than the potential earnings in a plan outside their state.

Depending on a family’s situation, having multiple plans from different states may be a good idea. Every plan is different, and families are forced to make careful choices to be successful. Families may not even realize the potential choices. 529 plans have different investment portfolios that perform better than others. Program options to choose from range from risk based asset allocations, age-based plans, and even those with a fixed earning. Customer service may vary widely. Also, the service fees for things like enrollment, maintenance, and management of the account can vary and make a big impact on how quickly the clients account may grow.

More to consider is a great resource to compare 529 plans. But families face more variables than they realize. How can you give personal advice on the best plan for your client?

Our dilemma

As you know, brokers can sell “advisor-sold” or “broker-sold” 529 plans. However, broker-sold plans are often not the best product for our clients because of the commissions which impact their overall investment. Fee only RIAs are simply left out of broker-sold plans due to our fiduciary responsibility to put the needs of our clients over acceptance of commissions. (At Capstone Wealth Partners, we try to educate our clients about the types of advisors available to them.)

Some movement is being made and conversation is happening around the real need for a true fee only advisor-supported 529 plan; however, we still are left in a situation where families need 529 advice and advisors don’t have many options.

More problems

Many direct-sold plans won’t talk to us as fee only RIAs. Often times, some advisors find success with Powers of Attorney on behalf of their families to contact the direct-sold 529 plan. We are still restricted in what we can do for them.

We understand the market forces at work and know how to move money around to make it work for our clients. But with 529 plans, owners can only move their money twice during any one year. You might as well tie the hands of an advisor!

So, it is a dilemma. Families with college-bound children NEED to include a 529 plan in their overall financial plan. They need to understand the choices involved. They need to understand how the 529 plan can work for them, not only their college student but also their K-12 student. However, in many cases advisors are somewhat restricted on what we can do to help, and without arranging some kind of fee for our service we won’t get paid.  

Paying for college is the number one concern of most families today. As advisors, we know the importance of this piece of the financial puzzle and can help our families make the best choices for their needs.

In conclusion

Thoroughly research the plan that is right for your client and understand if their state offers a tax deduction. As we discussed, fee only RIA’s are not able to be to hands on with the management of the funds. When meeting with new clients, it is common to see parents with juniors in high school that are fully invested in stock mutual funds because they never bothered to review their asset allocation since the time they opened the account.  The age-based portfolio option in a direct sold plan that invests in low cost mutual funds and avoids commissions is a way to ensure the funds are invested appropriately. These plans are built to automatically adjust the mix of stocks and bonds to be more conservative as college gets closer. They aren’t perfect but they ensure that clients aren’t over-invested in the market as their goal draws near.

We are hopeful that there will soon be a 529 for RIA’s like ours. Until then, monitoring the accounts through aggregation software can be a great way to oversee the accounts. Some RIA’s are even charging their assets under management fee on the account and billing the fee from another account within the family.

Originally published 5/2018
Updated 1/2020 

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