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Thursday, April 04, 2002

529 Woe

by: Tony Pennino

529 plans are supposed to be the next big thing: the 401(k) plan for the new century. But just as 401(k) plans are now coming under fire in the mainstream press -- usually over company stock related to the Enron debacle -- so too are 529 plans beginning to feel the heat from journalists. The difference is that 401(k) plans are a couple of decades old while 529 plans are virtually infants.

The latest journalist to investigate 529 plans is Tom Lauricella for The Wall Street Journal. In the article, "Some College-Savings Plans, Done at Work, Miss Tax Perks", he investigates 529 plans that are sponsored by employers. He cautions that some employees could be missing out on state tax deductions because the way these plans are structured.

The author charts the path of Grand Rapids, Michigan-based Tower Automotive (NYSE: TWR) and its selection of Alliance Capital as the vendor for the employer-sponsored 529 plan. TIAA-CREF runs the plan for Michigan, and yet the company chose Alliance, which runs the plan in Rhode Island. None of Tower's employees resides in Michigan. So none of them will be able to receive the state tax breaks Michigan offers to those residents who chose its own state-run plan; and, of course, Tower employees who live and work in Wisconsin and Ohio would not have those benefits anyway.

So why didn't Tower chose TIAA-CREF? Well, the company chose McDonald Investments, a unit of KeyBank, to conduct the search. TIAA-CREF only sells directly, and it does not utilize the advisor channel. Alliance does distribute through the advisor channel. Victory, another unit of KeyBank, provides the recordkeeping services for the Tower Automotive 401(k) plan.

All of which raises an even larger question. KeyBank, through McDonald, offers a 529 plan. Why didn't the firm cross-sell its 529 plan to its 401(k) client? It is possible that McDonald simply made it to the finals, and Tower simply selected another firm. And perhaps Tower Automotive felt uncomfortable having one firm administer more than one benefits product for its employees. In any case, it may be more difficult for firms to cross-sell between 401(k) plans and 529 plans than the originally hoped.

The MutualFundWire.com spoke with Joe Hurley, ceo of Savingforcollege.com, about this complex web of intersecting firms and states. "It is a concern, especially when you consider employer sponsored plans. What extent did the firms make disclosures? Some advisors are very careful advisors; they are very active in disclosing what is involved in the in-state plan," he said.

"There is an enhanced opportunity for the 401(k) provider to sell a 529 plan to employers, but the vendors have to be very clear with disclosures. They have to let both the company and its employees know what they offering versus what is available through the state," Hurley continued.

"There is a definite movement of getting 529 plans into the advisor channel. And this can be a good thing because it gets some people to use 529 plans who might not have used them otherwise. People will pay for advice so long as it is good advice. But, there is another question to be asked. 529 plans are a very new product. Where is the advisor on that learning curve? Many advisors are low on that learning curve, though some are not," the executive contended.

But what about TIAA-CREF, which would not even be considered in the Tower Automotive search because that firm only sells directly? "That firm has been very active in trying to get the word out to advisors, in trying to educate that community about what they offer."

And does that help them since advisors cannot sell TIAA-CREF products (and, subsequently, profit from such a sale) regardless of how knowledgeable they may be about the plan? "Advisors can gain more credibility if they can discuss the TIAA-CREF plan. Some advisors put a great deal of emphasis on disclosure, in letting their clients know what is available."

Ah, but now for the $64,000 question: are employer-sponsored products going to be a good thing for the 529 biz. "Well," replied Hurley. "employers can be helpful for investors saving for college. Having the funds deducted straight from the paycheck certainly helps. Employers may also be able to provide support for their employees that individual investors might not have. 529's are a whole other animal than 401(k)'s. That has to be made clear."


"However, it is one thing to get the employer to agree on a 529 plan. It is another to get employees to sign up. I haven't seen any statistics yet as to whether employees are taking advantage of an employer-sponsored 529 plan or not," Hurley concluded.

Employer-sponsored 529 plans are an extremely complicated organism. There are a number of competing issues and interests that are pulling and tugging at investors and fund firms alike. Offering a 529 plan to employees is a no-brainer for an employer because, unlike with a 401(k), the employer has no costs or fiduciary responsibilities. But the fund firm that makes the best sense for an employer might not make the best sense for an employee. Or it might make the best sense for employees who work in factories in State X but not for those who work in State Y. And now the mainstream media is beginning to focus on the issue and concluding, as Lauricella has, that an employer-sponsored 529 plan may not be the best bet. Firms have to gird themselves for the possibility that 529 plans may not be as easy a sell as they believe through an employer-sponsored program. 

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