Data & Research September 8, 2010

More Parents Saving for College, but Falling Short of Goals

Fidelity Investments recently released the results of their 4th annual College Savings Indicator study, as well as new guidelines for how much parents should be setting aside from their income into a 529 college savings account.  

 

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The study found that 67% of parents have begun saving for their children’s college expenses, which is up from 58% in 2007. However, the percentage of college costs these parents are expected to accumulate is only 16% of the total expense. In 2007 when the survey was first conducted, parents were expected to save 24% of total costs.   

However, this harrowing statistic can be expected to change in the coming decade. Fidelity found that the number of parents of preschool-aged children who are saving for college is growing dramatically.  Over 40% of parents with preschool-aged children (ages 0-5) have started saving for college in a dedicated account versus only 28% of parents with children already in high school (ages 14-18).  And because they’ve started saving while their children still have more than 10 years until college, they will have accumulated much more savings than parents who waited until their children were older to start saving.  

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“As parents see the cost of college continuing to increase each year, they are realizing they need to start saving earlier to meet those rising costs,” said Joe Ciccariello, vice president, Fidelity Investments College Planning. “While starting early is a critical step, it’s never too late for parents with older children to start contributing or, at the very least, engage in conversations with their children about paying for college.”   

Fidelity also produced new college savings guidelines to help parents quantify how much they should save annually in a 529 savings account in order to be prepared for future college expenses. These new guidelines calculate the true cost of tuition for public and private schools after scholarships, grants and expected family contributions are factored in, and provide guidelines of what the percentage of income parents should save each year to meet these costs. 

In its press release, Fidelity used as an example a family making $75,000 a year who expect to send their child to a four-year public college or university. Fidelity calculated that they would need to save 3% of their salary in a 529 plan each year (roughly $2,250 a year or $190 a month) over an 18-year period in order to have saved sufficient funds to cover all qualified college expenses after grants and scholarships are factored in. 

With the majority of parents aware of the need to save for college, why are so many families still falling drastically short of what college actually costs?  As with nearly everything these days – the economy is largely to blame.  

Nearly a third of parents surveyed withdrew from their child’s college savings account to meet other financial needs, with 13% saying it was due to a job loss. Other reasons reported for accessing the accounts were to help pay basic living expenses (25%) and to pay for unexpected medical costs (14%). 

Fidelity found that in this volatile marketplace, more parents of high-school aged children sought help from financial advisers than in previous years – 33%, up from 28% in 2009.  

 

Data & Research September 8, 2010

Roth 401(k) Feature in 29% of Plans

A new Hewitt Associates study of the Roth 401(k) feature found that 29% of mid- to large-sized employers offer it and 25% are very or somewhat likely to add it in 2010.

 

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According to a Hewitt research paper, the largest barriers among plan sponsors reluctant to add the feature this year are the potential lack of participant usage (54% of respondents) as well as the administration complexities and/or implementation cost (51%).

Hewitt researchers had sympathy for those reluctant to jump into the Roth 401(k) waters. “Adding a Roth feature is not as simple as clicking an on/off switch—it takes considerable planning, implementation, and communication,” Hewitt wrote. “Communication is especially important, and tools must be made available to help employees navigate this new and complex decision.”

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Meanwhile, according to Hewitt, 7.4% of active workers elected to save through a  Roth, where available. The average Roth deferral was 6.8% of pay, with a total contribution rate (including before-tax, after-tax, and Roth) of Roth users at 10.8%.

Usage of a Roth 401(k) feature ranged from 4% to 22% of participants with most companies seeing low Roth usage either recently having implemented the feature or automatically defaulting their new hires into a before-tax option (rather than Roth). Plans with relatively higher usage had been early adopters of Roth and/or are organizations with more financially savvy populations. Most early adopting employers are insurance, financial services, or professional services organizations.

Hewitt found that overall participant Roth 401(k) usage tends to grow through years one and two, and then stabilizes after three years. Seven percent of workers added the Roth after a year, a number that rose to 15% after 36 months. Usage among participants who joined the plan after the Roth feature was added was substantially higher, with nearly 13% of newly enrolled workers opting to use a Roth 401(k) feature.

Younger participants are most likely to use a Roth 401(k) feature. Where available, 16.6% of workers in their 20s elected to use a Roth 401(k) versus only 4.2% of those in their 50s. In terms of salary, those earning between $60,000 and $80,000 had the highest usage of a Roth 401(k) feature. However, considerable adoption was also seen in all income levels above $40,000.

Hewitt researchers contended that while adoption rates are still somewhat limited, that picture is likely to change. “Given its relatively short history, a Roth 401(k) option has proved beneficial to a meaningful segment of plan participants,” Hewitt wrote. “Data shows there is genuine participant interest in and significant use of the Roth design. Further, having one may actually increase participants’ retirement savings. The Roth feature is increasingly becoming a more prevalent 401(k) and 403(b) feature and is likely to become an inherent feature in all plans— especially with pending legislation expanding its use.” 

 

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