How To Make 529 Plan Service Pay Off

Art by Janice Chang

Generally speaking, 529 college savings programs are either directly sold through state-sponsored investment providers or sold through advisers at broker/dealers working for a commission earned on either an A or a C share, says Glenn Sulzer, senior analyst with Wolters Kluwer Legal & Regulatory U.S. in Riverwoods, Illinois.

“The revenue opportunities for retirement plan professionals may be limited to broker/dealers and to institutional providers, rather than registered investment providers (RIAs),” Sulzer says.

However, a number of RIA retirement plan advisers have added 529 plans to the services they provide in order to reinforce their relationship with sponsors and participants. These RIAs are compensated for the advice they give on 529 plans either through their one-on-one advice fee or perhaps through a financial wellness fee.

“Adding 529s can add additional depth to retirement plan advisers’ engagement with both the sponsor and participants,” says Peg Creonte, senior vice president of business development for Ascensus’ government savings division in Newtown, Massachusetts. “Saving for college is a priority for families, and with their tax advantages, 529 plans can be a valuable tool.”

However, before adding them to their practice, advisers should be aware that, in all likelihood, they will need to educate participants about what a 529 plan is, says Russ Tipper, senior vice president, Capital Group, home of American Funds, in Los Angeles. Pointing to a survey that Edward Jones conducted last May, he notes that only 29% of Americans correctly identified 529s as an education savings tool.

“Clearly, there is a lack of awareness among families, who don’t even know that 529s exist,” Creonte concurs. “We have a long way to go.”

This prompted Ascensus to partner with many of the states that sponsor 529s, as well as the investment firms that offer these plans, to launch a 529 awareness campaign on PBS this year, Creonte says.

Learning From 529 Plan Leaders

Richard Brothers Financial Advisors of South Portland, Maine, has offered 529 plans to its retirement plan participants for the past 20 years and has seen as many as 70% of participants invest in them, says Randy Richard, president. The practice includes the offering as part of the fee it charges for advice, he says. For parents, he says, “the 529 discussion is really important and something I feel passionate about.”

Essex Financial, an RIA in Essex, Connecticut, got into the 529 game eight years ago. James Sullivan, vice president, says advising on the plans, for which he increases his fee by 50 basis points, “is more of a value-add than a true revenue generator. I do it to help solidify the relationship with the plan and the participants rather than as opportunistic cross-selling.”

Matt Twedt, president of intellicents in Albert Lea, Minnesota, also believes that offering 529 plan-related advice, as well as other options, strengthens his relationship with sponsors and participants alike. “I look at working with participants holistically,” he says. “If you are adding all of these extra touches, then all of a sudden, they are not just working with you on the 401(k) but on education planning, perhaps a Roth IRA and/or life insurance—once you get into two to three areas of a person’s financial planning, you are solidifying that relationship.”

529 plans offer many benefits to participants, not least of which is a savings plan that locks in money for a child’s college education, says Tom Rowley, director of retirement and education strategies at Invesco in Houston. Before their introduction in 1996, he was saving for his own children’s education in a separate savings account that, at times, the family dipped into for emergencies.

“Many states offer a tax benefit, either as a tax deduction or a credit,” Creonte says. “Earnings that grow on the money invested in the account are not taxed, and when you take the money out for qualified education expenses, it is not taxed. Furthermore, the account is only counted as a parent asset, so it has very little impact on financial aid.”

And some 529 plans have tools built in that permit families to ask relatives or friends to contribute to the plan instead of giving a birthday, holiday or other present, she notes.

For grandparents who want to contribute to their grandchildren’s education, there are estate planning benefits, says Jeff Winn, managing partner at International Assets Advisory in Orlando, Florida. “Every dollar that goes into the 529 is viewed as a gift,” he says. “An individual can contribute up to $15,000 a year into a 529, so two grandparents could contribute $30,000 without incurring any gift tax up to five years for a total of $150,000, and they could prefund it by taking that money immediately out of their taxable estate. This is a great way to reduce estate taxes and leave a legacy.”

529s also offer a lot of flexibility in that if the child for whom the account was set up decides not to go to college, a different beneficiary can be named—even a grandchild, Twedt notes. And should there be no need at all to fund a college education, the funds can be accessed, although there will be taxes and penalties incurred, he notes.

In addition, parents retain ownership of the assets in the plan, Sullivan points out. “The 18-year-old cannot take the money out and buy a motorcycle,” he says.

Considerations When Recommending a 529

When recommending a 529 to individuals, the first thing that intellicents does is check to see if the state in which they reside offers a tax benefit for 529 contributions, Twedt says.

Before advisers add 529 plan services to their practice, Rowely says, “they should know and understand the different between in state and out of state plans, the tax benefits, fees and expenses, and administration and payroll issues, and how they affect financial aid eligibility. If you have this covered, you’ll have a pretty good understanding of 529 plans.”

For registered reps at broker/dealers selling products within 529 plans, in March, FINRA launched a 529 Share Class Initiative to ensure they are selling the right share class based on the age of the beneficiary and the number of years until the funds are needed to pay for the beneficiary’s qualified education expenses.

With A shares paying an upfront load but lower annual fees thereafter, this share class may make sense for parents whose savings time horizon is longer than seven years, Twedt says. “With that said, if you have a middle schooler who will use the funds in five to six years, the 5% up front sales load may not make sense, and it might be better to go into a higher fee with the C share.”

For advisers at broker/dealers selling 529s, it is important that they select a share class “that meets the client’s goals, that the commissions are disclosed, that the investment managers’ fees are reasonable,” says Mark Johannessen, a principal at Sullivan Bruyette Speros & Blayney, a financial planning firm in McLean, Virginia. “If you take a fiduciary approach by putting all of these things in place, follow through in subsequent meetings and document your process, you will meet FINRA’s standards.”

To offer more flexibility, Invesco has a 529 C share that converts every five years to an A share, Rowley says. A report from Strategic Insight in January revealed that there are 19 other investment firms that also offer convertible C shares.

American Funds is one of the firms that offers this option. “We offer choice around share classes that the adviser can leverage based on a client’s specific situation,” Tipper says. “It’s more important than ever for financial advisers to add value to their clients and discuss the options that are available to them.”