Roger Michaud, chairman of the College Savings Foundation and a senior vice president at Franklin Templeton Distributors Inc., stands behind Section 529 college savings programs as the best way to pay for increasing higher-education expenses.
Roger Michaud, chairman of the College Savings Foundation and a senior vice president at Franklin Templeton Distributors Inc., stands behind Section 529 college savings programs as the best way to pay for increasing higher-education expenses.
The tax benefits are the top reason. The investments grow tax-free as long as the funds are used for college expenses, and many states offer additional tax benefits.
“If you don't have to give up 30% and 35% — and in some cases more than 40% — of your earnings to state and federal taxes, you have more of that growing and working for you,” said Mr. Michaud, whose firm is the program manager of New Jersey's college savings plans.
How much the money grows depends on how it is invested, and here there is good news: The number of investment choices is on the rise within most plans, he said.
Options range from Federal Deposit Insurance Corp.-insured accounts to a mutual fund that is invested abroad in equities, Mr. Michaud said.
In addition, thanks to pressure from officials of states that sponsor the programs, most investment managers in the past few years have reduced fees in 529 plans.
Mr. Michaud recently sat down to discuss college savings investment vehicles.
Q. About three-quarters of the money in 529 plans is in age-based portfolios. Why are these so popular?
A. There's a peace of mind with an age-based option. Parents can get an understanding of what an age-based is, how it migrates to a portfolio over time that's less and less exposed to equities positioned at the right time for liquidations. I think parents then decide this is the best for them because they're not making decisions determined by current fear of the market.
Q. Some numbers suggest that sales into financial-adviser-sold plans haven't gone up as much as sales into direct-sold plans. Why?
A. What we're seeing in the field is that the adviser is now incorporating college savings in their retirement-planning discussion because they are two simultaneous priorities. Even meeting with a younger couple today, when you ask them their priorities going forward, sending their children to university as well as saving for retirement are one and two on the list. Advisers are deeply entrenched in this. In some states, there may be some incentives to send them direct, maybe a state that only offers a direct-sold program with tax benefits embedded into it. Some advisers are willing to give up that portion of the assets and still give them direction to go direct and maybe help them make some investment choices.
Q. Are there certain investors who shouldn't go the direct route?
A. There are three necessary components for an individual to go the direct route. They have to have the time to do their own research and look into these programs. They have to have a bit of expertise, and they also have to have the desire to pay attention to this year after year. If they are missing any one of the three components — and many are missing two and in some cases all three — they should be working through a financial adviser and getting the help that they need to make the best choices.
Q. Were complaints about how 529 plans performed in 2008 valid?
A. If you had sat, for example, in an S&P 500 option fully invested in 2008, just like the index itself, you were down 35%. That's certainly not anything that makes you happy. But we don't have a great deal of individual savers who are only invested in the S&P 500. It's a component, with three, or four or five, different investments within their single savings plan. Is there a risk someone could have been down 35% in one of our programs? Absolutely, if they had done that. But I would argue they may have taken their eye off the ball and didn't have the commitment to pay attention to this.
Q. How are investment options changing within the plans?
A. If you look at the kinds of options now available in 529s, it's pretty broad. There are states that are adding more managers, so their list of options, instead of having one or two equity choices, are now increasing to three and four. Instead of having a single age-based option managed by a single firm, they may have a number of age-based options that are either run by different firms altogether or their tracks are different. You can have an age-based that's for the conservative saver, an aged-based that's for someone willing to take on moderate risk or for someone who's fully into it and investing for growth.
Q. For the adviser-sold programs, some states are making omnibus accounting available for certain advisers, such as those at Edward Jones. What is the benefit of this?
A. It gives them a more holistic approach to looking at the complete picture. All the assets are in front of them, and it allows them to do a better job of weighing risk within their entire holdings, as opposed to just in their retirement account or just in their taxable accounts. And you've eliminated multiple tax reporting. You get a single 1099 for all of your assets.
Q. Are the gifting benefits of 529s often used?
A. For advisers that are much more deeply involved in client portfolios and actively involved in estate planning, the upfront-gifting provision that allows you to put $65,000 per parent or grandparent upfront, or $130,000 jointly, has become a much bigger, active part of the discussion. And while you're gifting it five years upfront, you're still totally controlling it, who the beneficiary is, where the dollars are invested and if there are necessary changes along the way.
Q. At the end of the year, we always hear pleas from states for parents and grandparents to skimp on the toys and contribute to college savings. Do people really do this?
A. We coined the phrase “trading toys for tuition.” Grandparents in many cases don't have the ability to give $65,000 but can open an account with $1,000 or $5,000. It makes a big impact. And even if in the unfortunate situation that the grandparent isn't there on the day the grandchild graduates from the university, that child at least is graduating knowing that their grandparents had something to do with them getting to that point in time. So that legacy is an important part of the process.
lskinner@investmentnews.com
