Why 529 Accounts’ Evolution Makes Them Stronger Tools for Advisers

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.”

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.