529s Still Hope to Become as Mainstream as 401(k)s
September 22, 2003
The 529 college savings plan has yet to catch America's attention the way many providers would have hoped. While it is still early in the product's lifespan, it has struggled with profitability issues, low awareness levels among average investors, and potentially crushing legislative barriers.
However, account sizes have been increasing as well as overall assets. Awareness is growing. And optimists have some positive developments to point to - including Charles S. Toth, chairman of the College Savings Foundation, a Washington-based organization representing 529 providers. Toth, who is also Merrill Lynch's director of retirement and education savings, recently spoke with Money Management Executive Associate Editor Chris Frankie about the future direction of the industry, its upcoming busy season and the College Savings Foundation's priorities.
MME: What issues does the College Savings Foundation plan to tackle this year and in 2004?
Toth: At the federal level, the whole sunset provision is something that we have been concerned about. I had actually met with a few staffers of congressmen to talk about the importance of thinking about this. We will continue to work on educating the decision-makers in Washington that they have to move on this sooner rather than later.
Secondly, we want to start actively engaging and talking to various states to reconsider their tax policies with respect to 529 programs.
MME: Some feel that by putting money in a 529 plan, they are gambling that withdrawals may not be tax-free at the federal level when their child needs the money for college, due to uncertainty surrounding the reauthorization of the 529 sunset provision by Congress in 2011. Is the industry doing anything specific to calm those fears, or is it taking a wait-and-see approach?
Toth: We are concerned that individuals put their faith in the government that they will
make that sunset permanent. Unlike the IRA, for example, or the 401(k), where if the sunset provision didn't happen, the individual investor would only have the contribution limit lowered back to previous levels. The time where the provision was enacted could be viewed as a time where the individual was permitted to contribute more.
Whereas in a 529, the real incentive comes at the end of the road when the child goes to college. If the sunset provision isn't extended, the benefit might never occur if the child doesn't go to college until after 2011. So that's something from an industry standpoint that we want to push on.
MME: If that sunset provision is not extended, that would be a huge blow to your industry, wouldn't it?
Toth: I think it would be a huge blow to investors. And, yes, I think it would be a huge blow to the industry because I think many of us have felt that this was an important incentive to help this industry grow. But, I would also say I am pretty confident that I think both Republican and Democratic support is there because the public policy is so important.
MME: Many in the 529 industry point to the success of the 401(k) plan and its relative anonymity 25 years ago and draw parallels between the two products. However, it seems 529s have a number of growing problems. Do you think the two products are a fair comparison in the early stages?
Toth: We did take a look at some adoption rates in the 401(k). There wasn't a lot of good hard data - 25 years ago is before computers became as widespread as they are today, and with them, databases. But, from the little bit of information that was collected since that time, it appears that the 401(k) kind of bounced around early on.
I think the employee match probably was one of the events that triggered 401(k) growth. So, I think you could raise some parallels. I think that if you were going to ask, "What's the trigger event that could really make 529s take off?," I would say two tremendous trigger events would be getting the sunset provision made permanent and getting more states to adopt tax-equity.
MME: Many have said that Lifetime Savings Accounts would provide more flexibility as to where money can be invested as opposed to 529s. How big a threat are LSAs to the 529 industry?