The Long Slow Decline of the 529 Plan. WSJ

Education and Your Money by AnnaMaria Andriotis (Author Archive)

Published October 5, 2010 Is this the real beginning of the end for 529 college savings plans?

The Long Slow Decline of the 529 Plan

Read more: Wall Street Journal Ever since the crash, parents have been wary of 529 plans. Now they’re doing something about it. Parents who already have accounts are contributing less – the average monthly contribution for the second quarter of 2010 was just $205, down 21% from the same period a year ago, according to the Financial Research Corporation.

And while investors are still opening 529s, they are doing so in much smaller numbers. New savers are on pace to open about 324,000 new accounts this year – less than half the number of new accounts last year.

“Parents are looking for more conservative places to park money,” says Deborah Fox, founder of the financial-planning firm Fox College Funding. For that they’re turning to safe, guaranteed investments. At least 50% of parents saving for college say they’re using savings accounts or CDs, according to Sallie Mae. And while the college lender doesn’t have historical data, financial planners agree that parents have grown reluctant to put college money in the markets.

Fox says that at least 75% of her clients ask about options to avoid risk—CDs and other savings accounts–compared to about 10% in 2007. In response, 529 plan administrators have started offering more savings accounts.

Just last week, Fidelity announced a savings account option in five college savings plans it manages, including Arizona, California, Delaware, Massachusetts and New Hampshire – bringing the total number of 529 plans with guaranteed investment options to 13, more than double the number from three years ago.

The problem, of course, is that simply saving for college – as opposed to investing – presents an even more daunting financial challenge, especially with savings rates so low these days.

Even over the 15-year period ending in 2009, the S&P 500 index returned a compounded average of 8.1% per year. Someone who saved using six-month CDs would have averaged 4.1%. To make up the difference, a parent saving today for an infant would have to sock away at least 37% more – and that’s just for those who plan to cover half of 2028 tuition. Which is why, given the tax benefits of 529 plans, financial planners still recommend the investing vehicles.

If the markets make them nervous, they can always balance their exposure to equity funds by investing in less risky options, like bond funds and, increasingly, savings accounts.

HERE IS A COMPARISON OF AN IRC 529 and an IRC 7702 AS USED FOR COLLEGE SAVINGS

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June 12, 2011 · Jennifer · No Comments
Tags: , ,  · Posted in: 529 decline for college, COLLEGE SAVINGS PLANS, Decline of 529, WSJ

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