Elizabeth’s note: The numbers in this story are terrifying for a mother with two kids to put through school. It’s a good thing their favorite mac ‘n’ cheese meal is inexpensive.
Brooke’s note: I’ve been hearing for years from advisors that they suspected that some 529 plans were a boondoggle. This article contains good information to begin evaluating that concern. It’s interesting to see the drastic action that Fidelity, T. Rowe Price and Vanguard are taking to make 529 plans more economical.
In a sign of the economy’s tight squeeze on parents trying to save for their children’s college, a growing number are turning to financial advisors to help – and demanding more of those advisors, according to an annual survey of parents by Boston-based Fidelity Investments.
The number of families who sought help from financial advisors jumped to 33%, from 28% in 2009, according to Fidelity’s Annual College Savings Indicator Study.
But advisors aren’t just filling out the 529 paperwork – in fact, the survey shows the majority of advisors don’t automatically steer clients to those college savings plans, which tend to have high fees.
529 plans half-empty
Fewer than half of parents in Fidelity’s survey working with advisors reported they proactively mentioned 529 plans, according Jeff Troutman, vice president of college savings at Fidelity Investments.
But more advisors are helping clients in other ways: Those who helped research schools jumped to 25%, up from 13% last year. The percentage that helped clients navigate the grant process was 30% up from 16%. The percentage who helped clients secure financial aid jumped to 37% from 20%, according to the survey of 2,500 parents nationwide.
Advisors are even researching schools to estimate what kind of financial aid package a student is likely to receive, says Troutman.
Advisors are stepping in to help parents who are staring down two frightening numbers: $32,500 and 5.4%.
The first is the annual cost for an average family to send a student to a private four-year school, according to Fidelity. The second number, 5.4%, is the average annual increase in the tuition price.
A public college is education is not quite as costly: $14,500-$16,000 per year, according to the survey, released just in time for the start of school at the beginning of September.
Parents are projected to be able to meet only about 16% of the costs of their children’s college educations, down from 24% in 2007. Those who reported working with an advisor are projected to meet 28% of costs.
Lower 529 fees
Although advisors aren’t wholeheartedly embracing the 529 market, this year might be a good time to revisit the cost-benefit of the plans. In the last year, T.Rowe Price and Fidelity have lowered their fees by almost a fifth and a half, respectively, on 529 plans. Vanguard also dropped its fees on the 529 plan in New York, from .49% to .25%.
Laura Pavlenko Lutton, editorial director in the fund research group at Morningstar Inc., says investors may have started catching on to the higher fees while Troutman attributed the lower fees to more competition.
The plans, which offer parents and others the option of contributing large, tax-free investments at one time, were introduced in 1996 and expected to be a panacea for the college savings problem. For example, a family can contribute $130,000 to their child’s 529 plan every five years.
There are some drawbacks to the plans, however. “It’s kind of cumbersome to enroll, you can only change your investment once a year, and they’re typically more expensive,” says Pavlenko Lutton. There hasn’t been a lot of transparency to enable comparisons to other funds, she says.
Troutman agrees that one of the biggest downsides to 529s is that you can only change 529 plan once per calendar year. Families had the option to change 529 plans twice in 2009 because of the recession – a change that those in the industry are lobbying to keep.
Rick Darvis, co-founder of the Plentywood, Mt.-based National Institute of Certified College Planners, says 529s are not as flexible as other plans, like a Roth IRA. For example, if a student ends up dropping out of school, parents are left paying taxes on the money, Darvis says. Some savings from 529s can also be taxable if the student wins scholarships, he says. Darvis suggests looking at IRS publication 970, the form that accountants file with 529 plans. “A lot of accountants will have their mouth open,” he said, because they’re surprised about what can triggers taxes on 529 plans.
Some advisors warn not to be too concerned with providing for every dime for higher education.
College v. retirement
“Don’t let college wag the retirement dog,” says Darvis. One of the biggest obstacles to college savings is not fees, but income taxes, he says. Darvis tries to help his clients save with pretax dollars by lowering the impact of taxes on his clients’ income.
Advisors should be realistic about whether their clients’ can meet their goals, says Robert Glovsky, chairman of the Board of Directors at Certified Financial Planner Board of Standards. Glovsky also said some fee-only advisors may charge an asset-based fee on 529 plans.
“I hear clients say, I don’t want to rely on my kids during retirement, but I also want to pay for my kid’s college,” he says. Unfortunately, not everyone can have it both ways.
The one silver lining in Fidelity’s survey is that more parents seem to be aware of the need to save: more than two-thirds of parents have begun saving for college, up from 63% last year, And more than half of families reported being familiar with 529 college savings plans, up from 40% last year.