Why 529 Accounts’ Evolution Makes Them Stronger Tools for Advisers

529 accounts not used for education can now be put into Roth IRAs, further strengthening the offering as an employee benefit.

As of 2024, 529 plan investments not used for educational purposes can be transferred to a Roth individual retirement account. That’s just one development in the educational savings program that plan advisers and sponsors should be aware of in terms of their advancement as an employee benefit, says Peg Creonte, president of government savings at Ascensus, who worked on 529s in their early days.

“It used to be that you could only use 529s for college,” Creonte says. “Now, you can use it for K-12, apprenticeships, paying down student loans and now you’ve got this Roth rollover. The flexibility in terms of how you can use a 529 has changed very significantly.”

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Creonte, whose Ascensus team works with employers, asset managers and direct-to-consumer 529 investing, believes there is an opportunity for plan advisers to work with sponsors on their 529 program, particularly with student loans being such an issue for may employees today.

“You’re basically stopping a problem,” she says. “You are providing a solution so that [participants] don’t fall into debt. … If you look at an employer base, chances are people are either paying off student loans or want to be saving for education.”

Assets in about 90% of all 529 plans hit $415 billion in 2023, up from about $400 billion in 2021, according to analysis from Morningstar—with Creonte noting that Ascensus had $200 billion in assets under administration.

The growth in 529s comes as student debt pressure is top of mind in the retirement industry, including its impact on people’s ability to save. In a recent research report, the Employee Benefit Research Institute and J.P. Morgan Asset Management found that those making student loan debt payments tend to have lower 401(k) contribution rates and account balances compared to those who are not.

On Monday, Fidelity Investments launched its student debt 401(k) matching contribution program made possible through a SECURE 2.0 Act of 2022 provision that went into effect in 2024. Through the service, the recordkeeper will help plan sponsors set up a program by which employees’ payments on student debt can be matched by the employer with a defined contribution retirement contribution; it anticipates providing the benefit to more than 1.2 million participants.

Roth Option Opens Door

It will take years before those working with 529 plans know if the Roth conversion is popular, Creonte notes. She thinks, having seen how 529s are used for years, that most people will take advantage of the education benefit first—but that optionality will drive more people to sign up.

“People are unsure of opening a 529 because they feel like the money is going to be trapped,” she says. “Having an offramp into a retirement product is really important from a friction-of-opening [standpoint].”

With the conversion in its first month of availability through January 2024, Ascensus has seen 768 transactions in which 529 savers took withdrawals to roll their funds into a Roth IRA. Of those, only four were for adviser plan accounts, meaning most were done by self-directed investors. Creonte thinks some of that may be due to adviser-sold accounts being used for the intended purpose of education, but also due to people feeling more comfortable using 529s on their own.

The direct-sold space has grown as some large asset manager providers, such as the Vanguard Group, T. Rowe Price and Charles Schwab have offered 529 accounts via their retail channels, which in turn has built up the marketplace. Meanwhile, state-offered plans are marketed to residents, with state treasuries promoting their 529 offerings.

The biggest challenge to having employers offer 529s is implementing them across multiple states, Creonte says. Since most of the offerings are state run, it can be complex to set up an employee program across states.

“If you’re sitting in two states that have tax advantages for their particular state plan, that’s where it gets challenging,” she says. “That’s definitely something that we’re trying to work on.”

Ascensus employs a team of institutional relationship managers focused on working with employers on 529s, and those managers sometimes go into workplaces to discuss them with employees.

Educated Expansion

Creonte was involved with 529 accounts in their early stages about 20 years ago. She says people did not know what they were, and 529s were mostly offered via financial planners. They were also often prepaid plans that allowed people to lock in some or all of tuition payment with an in-state school. That option is less popular now, with 529s seen as more open-ended educational investment vehicles for use at any school.

“When I started here, we all fit in a room,” she says. “Now, we are spread to basically every corner of the country.”

More recently, Ascensus has been focused on improving the investor experience, investing in a mobile app and the general enrollment process, Creonte says.

The firm has also focused on the withdrawal process, putting the 529 to work for an education benefit. In 2022, Ascensus partnered with a firm called Flywire to enable investors to pay tuition and education-related bills directly from their 529 to the educational institution. Creonte says the program has had more than $1 billion flow through it so far and anticipates it could reach $2 billion by the end of this year.

Correction: fixes the timing on the Roth IRA conversion to just one month of data.

FlexPATH, Wood Group Beat TDF-Selection-Based Lawsuit

A 401(k) complaint alleging fiduciary imprudence was rebutted in a 70-page review of the committee’s selection and review process.

A California district court has ruled in favor of the defendants in a case brought by 401(k) participants alleging that the plan sponsor and investment manager breached their fiduciary duties by imprudently selecting and sticking with target-date funds affiliated with the 3(38) investment manager and plan adviser.

The case, Robert Lauderdale et al. v. NFP Retirement Inc. et al., was resolved on Friday by U.S. District Judge James V. Selna in U.S. District Court for the Central District of California, Southern Division.

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The initial complaint was filed by the Schlichter Bogard & Denton law firm on behalf of the plaintiffs in February 2021, naming plan advisory NFP, the retirement plan committee of Wood Group U.S. Holdings and 3(38) investment manager flexPATH Strategies LLC, which at the time was an affiliate of NFP. In November 2022, the court dropped NFP from the complaint.

The 401(k) participants alleged that, rather than acting in the best interest of participants under the Employee Retirement Income Security Act, the plan sponsor and NFP prioritized investing in collective investment trusts managed by NFP affiliate flexPath, as well as failing to use the plan’s size to bargain for lower fees. The result, the plaintiffs alleged, was “substantial losses to investments” in participants’ retirement accounts.

In his February 23 decision, Selna reviewed the allegations in a 70-page “Findings of Fact & Conclusions of Law.” Through the analysis of the various charges against evidence presented by the defense, he concluded that the plan sponsor and its advisers proved they had conducted the appropriate due diligence in selecting funds and managing the retirement plan.

Wood is an international consulting and engineering company in energy and materials, and the 401(k) plan had $2.66 billion in assets as of 2020, according to data from Beacon, which, like PLANADVISER, is owned by ISS STOXX.

The court had held a “nine-day bench trial” hearing the arguments of both sides from March 21, 2023, through March 29, 2023, and September 5, 2023, through September 6, 2023.

Thorough Analysis

In his findings, Selna went through the selection processes Wood’s retirement plan committee undertook in choosing NFP and the flexPATH investment options for plan participants; these included creating a finalist list of competitors and negotiating down fees.

“By the time flexPATH was hired in March 2016, [the Wood retirement plan committee] had already collected and analyzed a significant amount of information about the Wood Plan that informed its decision to select the flexPATH TDFs,” he wrote.

The judge went on to further describe the investment policy statement created by Wood’s committee, along with flexPATH’s ongoing review of its TDF offerings, which included BlackRock Inc.’s passive funds. The judge also considered how often the committee met and what was reviewed. The detail went as far as to note cancelled meetings, such as one intended for October 26, 2017, that did not happen due to the impact of Hurricane Harvey on the Houston area.

In going over the variety of allegations from the plaintiffs, Selna countered with evidence that the defendants had followed proper procedure under ERISA. Examples included:

  • The evidence showed that flexPATH did not receive additional compensation from the plan’s investment in the flexPATH TDFs;
  • The plaintiffs alleged that flexPATH selected the flexPATH TDFs because it needed seed money and to improve the marketability of the funds. However, the evidence showed that the flexPATH TDFs were fully seeded almost immediately after they were created;
  • The plaintiffs alleged that in December 2015, NFP formally announced a new program that incentivized NFP advisers to sell flexPATH by offering them bonus compensation whenever flexPATH TDFs were “implemented into” one of their retirement plan clients. But Selna found that the 3(38) management fee was not contingent on which funds were selected;
  • The plaintiffs alleged that there was no action taken on the underperformance of the flexPATH TDFs. But the flexPATH TDFs were performing as expected, given the inflation period. Selna ruled that the evidence showed that the Wood Committee appropriately considered and evaluated the reasoning behind the underperformance; and
  • The plaintiffs alleged that the Wood Committee never met with flexPATH. However, Selna noted, nothing in the law requires the Wood Committee to meet with its 3(38) investment manager; rather, it was compelled to monitor the TDFs’ performance.

Reasonable Decisions

Selna also noted at one point in the filing that a fiduciary’s duty, according to prior rulings, is not to “pick the best performing fund,” or the “cheapest possible fund available on the market,” but rather to show “a reasoned decision-making process” done through independent evaluation and with the appropriate methods “to investigate the merits of the investment.”

The plaintiffs were given seven days to file an appeal to the judgment, after which it will be filed in the Federal Rule of Civil Procedure 52(b), according to the filing.

Representatives for the plaintiffs did not immediately respond to request for comment. The Wood Group’s lead representation is Mayer Brown LLP, flexPATH’s is Seyfaqrth Shaw LLP, and NFP’s is Jenner and Block LLP, according to the court docket.

FlexPATH is no longer an affiliate of NFP, which itself is in an agreement to be acquired by Aon plc.

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