529 College Plans Stall, but Tuition Needs Grow
By Cyril Tuohy
Have 529 college savings plans run out of steam?
Heralded not long ago as an answer to the galloping cost of college tuition, 529 plans got off to a fast start, and it seemed as if the investments would catch fire along the lines of defined contribution plans like 401(k)s.
But the Great Recession took a hefty toll. And still, there was no letup in tuition rate increases for four-year private and public colleges. The question facing advisors is how best to reignite 529 plan sales with an economy on the mend.
Advisors need more marketing support, said Paul Curley, a Boston-based director with the consulting firm Strategic Insight, which has released its latest analysis of the 529 plan market. Advisors, he said, want more sales ideas, “conversation starters,” and higher-quality sales and marketing collateral.
“Advisors are leading the conversation in terms of 529 savings,” Curley said in an interview. “People are reticent, they are thinking of scholarship money, it’s a tough economy and it’s hard to set aside money, and for many parents it’s just a long way away.”
Strategic Insights’ 529 Advisor Study 2013 found that 74 percent of advisors said they – not their clients – usually start the conversation around a 529 college savings plans, Curley said. More than 500 advisors participated in the survey.
“It happens fairly often, as 47 percent of advisors say they initiate a discussion on the topic with a client once every three months, while 25 percent say they do so once every six months,” Curley said. Clearly, selling the 529 plan has become more difficult.
Like life insurance, 529 plans aren’t so much bought as they are sold, even with withdrawals for qualified education expenses remaining free from federal income tax, and states offering incentives to invest in the plans.
Launched more than 10 years ago, 529 plans offered advisors an additional arrow in their investment quiver, one that appeared would hit the bull’s eye in terms of an investment program. Account totals and asset balances grew rapidly.
By the end of 2008, there were 8.9 million savings plan accounts and an additional 2.3 million prepaid tuition plan accounts, according to Investment Company Institute data. By the end of 2007, before the financial collapse, savings plan assets had ballooned to $112.5 billion. Prepaid tuition plans reached $17.4 billion.
Fast forward to the second quarter of 2013, and 529 plan accounts had risen to 10.2 million. Prepaid tuition plans, meanwhile, were stuck at 1.2 million where they have been since 2009. Plan assets for 529 savings plans have come back with the robust stock market, reaching $184 billion. Prepaid tuition plans hit $21.9 billion, ICI data show.
Despite the numbers, Curley doesn’t think appetite for 529 has waned. Instead, the plateau represents the end of the first wave of growth. Parents who opened 529 plans many years ago are closing them as funds have been used to pay for their children’s education, he said.
“We’re entering Stage Two,” he said. “We’re no longer new kid on the block.”
The bulk of 529 plans – 93 percent – are sold through retail financial advisors and 7 percent sold through institutional financial advisors. The good news is that even if parents have backed off, mom and dad are happy to lend advisors their ear, Curley said.
“Our surveys show that parents want to know more about options for saving for education and financial advisors are one of the most important sources of information for those investors,” said Curley, director of Strategic Insight’s college savings and plan research practice.
Of the 93 percent of 529 plans sold through retail advisors, about half are sold through wire houses and half through independent broker/dealers. Recent growth has come from the fee-based and registered investment advisors (RIA) channel, he said.
The survey of more than 500 advisors found that 22 percent of RIAs and 29 percent of all financial advisors plan on recommending 529 college savings programs to their clients more often in the next 12 months than they did over the last 12 months. The percentages have gradually been “driving up” as people become familiar with 529s, Curley also said.
With the intense competition in the retirement market, some advisors feel the need to offer college planning to give them an edge. “Inversely, college planning has become a positive way to start a conversation,” he said.
Talking about children and education is easier than about how to pay final expenses with a life insurance policy, he said.
Student loan debt has crossed the $1.2 trillion mark, with the average borrower graduating with $26,000 in loans, according to The Institute of College Access and Success Project on Student Debt.
With that kind of financial burden, advisors will come around to the “529 talk” sooner, even if their clients would rather push the discussion back until later.
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].
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