The recession has taken an unfortunate victim - children. Diligent parents now facing difficult times have had to put the future on hold in order to survive the present. They've done this by reducing or stopping contributions to 529 college savings plans. This in turn has hurt 529 plans, like any other financial firm that has seen lower assets, and is spurring change.
Assets in 529 plans nationwide as of March 31 totaled $85.9 billion. Not bad, but that's a 22 percent decrease from a year earlier, according to the Financial Research Corp. of Boston. The plans have experienced a double whammy in both investment losses and contribution losses. The good news out of this is that the industry is trying to get back on its feet by making changes to encourage contributions.
The most enticing change is reducing the cost of the plans. Most plans have upfront fees that are used to pay financial advisers commissions and then have additional mutual fund management fees. In a new era of watching expenses, many college savers have been turned off by these fees and are saving in other investments, such as Individual Retirement Accounts. IRAs allow assets to be withdrawn penalty free if used for higher education.
The mutual funds in the 529 plans are starting to fight back by reducing the management fees. Last month, The Vanguard Group lowered its mutual fund fees in the Nevada 529 plan from as high as 0.70 percent to as low as 0.44 percent.
More fund companies are expected to follow, Joe Hurley of SavingForCollege.com told Investment News magazine after the announcement.
His Web site is an excellent source for finding plans with low fees. It allows side-by-side comparisons of state plans. Many people think they are limited to their state's plan, but actually most plans allow out-of-state residents to participate since the withdrawals can be used to pay for any college nationwide. Just be careful that an out-of-state resident fee is not charged. If a state offers an income tax deduction for 529 contributions, a resident will have to use its state's plan to get the tax benefit.
For families that do have a 529 plan now and are facing a job crisis, it is possible to change the beneficiary from a child to an adult family member, such as mom or dad, who may need to return to college for more training or a career change. The hope is that the funds would be replaced when income starts coming in from the new career. If any funds remain, the beneficiary can be changed back to the child later.
(Dan Serra is a financial planner with Strategic Financial Planning Inc. in Plano, Texas. E-mail him at firstname.lastname@example.org.)
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