Sign up today and take advantage of member-only content — the kind of timely, cutting edge industry insight that only Money Management Executive can deliver.
  • Exclusive Online Only Content
  • Free Daily Email News Alerts
  • Asset Management Blogs

MFS Talkin' Bout Generational 529 Plans

With the cost of a four-year stint at a top liberal arts college expected to reach $300,000 by 2016, getting the word out on 529 college savings plans has never been more important.

Still considered somewhat of an esoteric investment vehicle by many investors, 529s have yet to break out of their infancy stage. Although there are 72 million children under the age of 18 in the United States, only 3.7 million 529 accounts have been opened as of 2003, according to Financial Research Corp. of Boston. Getting financial advisers more familiar with their benefits presents an enormous opportunity for new and existing assets.

MFS Investment Management of Boston conducted a study recently to identify which generations of investors are most receptive to 529 plans and which plan features appeal to each demographic. The study was based on a Web survey of 307 MFS advisory board members, a group of leading industry producers.

The most common obstacle the advisers gave in selling 529s to the masses was clients either not wanting to invest in them or not having the funds to invest because their money is allocated elsewhere. The second biggest reason was lacking awareness or knowledge of the product. Other barriers included building client knowledge, fear of market depreciation, product complexity and tax treatment.

Key things investment pros consider when selecting a 529 plan include investment options, in-state tax deductions and past performance. Generally, the types of investment options available are advisers' No. 1 priority, and aged-based portfolios are the most preferred investment vehicles across all generations as opposed to individual mutual funds or asset-allocation funds. Aged-based portfolios enable the adviser to build an education savings plan based on clients' needs and risk tolerance and can also help overcome barriers to entry, particularly lack of funds, because the client can invest small amounts once the initial minimum contribution has been made.

One way MFS has reached out to advisers to increase awareness about 529s is through offering a "workplace" 529 plan. Essentially, they offer existing 401(k) clients a 529 option through payroll deferral.

Providing the adviser with the necessary tools to sell 529 plans is crucial to overcoming business challenges. Among the respondents, 35% said that prospecting and marketing tools were the most important services they need to boost sales. They also said that getting additional plans approved for sale by their broker/dealer and receiving advertising and public relations assistance were factors.

Awareness and use of 529 plans varies by segment of the population, the advisers said. Baby Boomers are the most likely to save for college, be aware of 529s and use them as a college savings vehicle. Individuals in the mature stage of life are second in awareness but are the least likely to use a 529 or save for college at all. Gen X households aware of 529 plans have a higher tendency than mature and Boomer households to use them as a college savings vehicle. It's worth noting, however, that while only 21% of Gen X households are saving for college, nearly 19% are using a 529 plan.

In terms of preferred features among the generations, respondents said that all three groups consider asset control and distribution options the most important. Gen X clients are more likely to pursue an aggressive growth strategy, while mature clients have more interest in estate planning. Currently, the 529 market is dominated by 10.5 million Boomer households, followed by 5.4 million mature households and 2.5 million Gen X households.

While predicting future demand is difficult, MFS was able to draw some conclusions about 529s for each generation. An estimated 57% of Gen X households have children under the age of 18, making them excellent targets for new accounts. Boomers are entering their peak earnings years and are perhaps the best target for converting UGMA/UTMA accounts, new accounts and gifting. Wealthy mature households will look to gift 529 plans to lower their estate taxes and help grandchildren through college, but overall the market will be a mixed bag due to limited resources.

Assets held in 529 accounts ballooned to $36 billion in 2003 from $19 billion the previous year according to FRC, which suggests that adviser and client education is improving. But for now, 529s are still too new and complex to be a household name.

Copyright 2004 Thomson Media Inc. All Rights Reserved.