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529 College Savings Plans What You Should Know

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529 College Savings Plans What You Should Know 529 Plans at a Glance What is a 529 Plan? How do 529 Plans work? Who sells 529 Plans? How are 529 Plans regulated? – PowerPoint PPT presentation

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Title: 529 College Savings Plans What You Should Know


1
529 College Savings PlansWhat You Should Know
  • 529 Plans at a Glance
  • What is a 529 Plan?
  • How do 529 Plans work?
  • Who sells 529 Plans?
  • How are 529 Plans regulated?
  • Issues
  • Resources for Regulators

2
529 Plans What You Should KnowWhat is a 529
Plan?
  • Established under Internal Revenue Code 529, a
    529 College Savings Plan is a qualified tuition
    program through which individuals make
    investments to accumulate savings for qualified
    higher education costs for beneficiaries.
  • 529 plans allow investors to save money in an
    account in which the earnings grow income-tax
    deferred and when used to pay for "qualified
    higher education expenses" will be federal income
    tax-free.

3
529 Plans What You Should KnowWhat is a 529
Plan?
  • In many states, participants receive state
    incentives, including tax deductions and
    exemptions, based on their participation in the
    in-state program(s).

4
529 Plans What You Should KnowWhat is a 529
Plan?
  • There are 2 kinds of 529 plans
  • PREPAID Plans
  • INVESTMENT/SAVINGS Plans

5
529 Plans What You Should KnowWhat is a 529
Plan?
  • PREPAID PLANS
  • Purchase future tuition today at a lower rateat
    any of a states eligible colleges or
    universities (or equal payments to privateand
    out-of-state institutions).
  • These programs pool money and make long-range
    investments so that earnings meet or exceed
    college tuition increases in the home state.

6
529 Plans What You Should KnowWhat is a 529
Plan?
  • INVESTMENT/SAVING PLANS
  • Allows participants to save money in a college
    savings account to fund a designated
    beneficiarys qualified higher education
    expenses.
  • Contributions limits vary depending on the
    characteristics of individual plans.

7
529 Plans What You Should KnowWhat is a 529
Plan?
  • Plans offer a variable rate of return based on
    the performance of the underlying investments.
  • Plans generally carry investment risk, which
    means the account value may increase or decrease
    depending on market conditions.

8
529 Plans What You Should KnowAt a Glance
  • QUICK STATS
  • Number of 529 College Saving Plan Accounts 7.2
    million
  • Account Value 64.6 billion
  • 97 percent of 529 Plan assets are in mutual
    funds
  • Source College Savings Plan Network, as of
    9/30/04

9
529 Plans What You Should KnowAt a Glance
  • Source College Savings Plan Network, as of
    9/30/04

529 Plan Growth 1996-2005
10
529 Plans What You Should KnowHow 529 Plans Work
  • Individuals purchase interests in a trust
    established by the state or its instrumentality.
  • Trust assets are invested according to the
    trusts stated investment objectives.
  • Issuers typically engage investment management
    firms to manage the investment of trust assets.

11
529 Plans What You Should KnowWho Sells 529
Plans?
  • Many states market their 529 Plans directly to
    investors using state personnel.
  • In some states, investments may only be made
    through state personnel in others, investments
    may only be made through broker-dealers and in
    others, investments may be made by either.

12
529 Plans What You Should KnowWho Sells 529
Plans?
  • Most states engage broker-dealers to serve as
    primary distributors for their 529 Plans.
  • In many cases, primary distributors enter into
    selling arrangements with other broker-dealers to
    serve as selling dealers to provide additional
    channels to distribute securities to customers.

13
529 Plans What You Should KnowHow are 529 Plans
Regulated?
  • Although most 529 Plans have been modeled after
    mutual funds or "funds of funds," they are not
    subject to regulation under the Investment
    Company Act.
  • 529 College Savings Plans, when established by
    states, are considered municipal fund securities
    and must comply with rules issued by the
    Municipal Securities Rulemaking Board (MSRB).
  • Pre-paid 529 Plans are not municipalfund
    securities.
  •  

14
529 Plans What You Should KnowHow are 529 Plans
Regulated?
  • The MSRB defines MUNICIPAL FUND SECURITY as
  • A municipal security issued by an issuer
    that, but for section 2(b) of the Investment
    Company Act of 1940, would constitute an
    investment company. Municipal fund securities
    generally have features similar to mutual funds
    and are not fixed income securities. Interests
    in . . . 529 college savings plans are examples
    of municipal fund securities.

15
529 Plans What You Should KnowHow are 529 Plans
Regulated?
  • Municipal fund securities are equity interests in
    an independently managed pool of investments.
    Investors realize gains or losses based on the
    performance of the pool's underlying assets.
  • Although municipal fund securities are similar to
    registered mutual funds, they are not subject to
    most of the federal securities laws applicable to
    mutual funds. This is because municipal fund
    securities are issued by state or local
    governments, which generally are exempt from
    these laws. 

16
529 Plans What You Should KnowHow are 529 Plans
Regulated?
  • Broker-dealers that effect transactions in
    municipal fund securities must comply with
  • MSRB rules
  • Anti-fraud provisions of the federal securities
    laws
  • Securities laws of individual states

17
529 Plans What You Should KnowIssues
  • 529 plans present all of the potential
    suitability,
  • disclosure and other sales practice issues as do
  • mutual funds.
  • Disclosure
  • Fees Commissions
  • Suitability
  • Sales Practices

18
529 Plans What You Should KnowIssues Whos
Concerned
  • States
  • College Saving Plan Network
  • MSRB
  • SEC
  • NASD
  • Congress

19
529 Plans What You Should KnowIssues Whats
Being Done
  • States Exams, Board-level Project Group
  • College Saving Plan Network Disclosure
    Guidelines
  • MSRB Proposed rules
  • SEC Task force, sweep
  • NASD - Sweep
  • Congress Hearings

20
529 Plans What You Should KnowIssues Disclosure
  • MSRB Rule G-17
  • Requires a broker-dealer to disclose at the
    point-of-sale all material facts about the
    transaction known by the dealer, as well as
    material facts about the security that are
    reasonably accessible to the market.
  • Obligates a broker-dealer that sells to a
    customer an out-of-state college savings plan to
    disclose that, depending upon the laws of the
    customers home state, favorable state tax
    treatment for investing in a college savings plan
    may be limited to investments made in a college
    savings plan offered by the customers home
    state. 

21
529 Plans What You Should KnowIssues Disclosure
  • MSRB is seeking to broaden Rule G-17
    point-of-sale disclosure interpretation to
  • Include references to other potential benefits of
    in-state investments.
  • Suggest that customers consult with a qualified
    adviser or contact his or her home states
    college savings plan to learn more about any
    state tax or other benefits that might be
    available in conjunction with an investment in
    that states college savings plan.

22
529 Plans What You Should KnowIssues Disclosure
  • A broker-dealer would violate Rule G-17 by
  • Informing a customer that investment in the
    college savings plan of the customers own state
    did not provide the customer with any state tax
    or other benefit when the dealer knows or has
    reason to know that such benefit likely would be
    available.
  • Informing a customer that investment in the
    college savings plan of another state would
    provide the customer with the same tax or other
    benefits as would be available if the customer
    were to invest in his or her own states plan, if
    the dealer knows or has reason to know that this
    is not the case. 

23
529 Plans What You Should KnowIssues Disclosure
  • VOLUNTARY CSPN GUIDELINES
  • In December 2004, the College Savings Plan
    Network, an affiliate of the National Association
    of State Treasurers issued a series of voluntary
    disclosure guidelines for 529 plans. The
    voluntary guidelines are intended to
  • establish a reference for basic disclosure
    practices
  • improve comparability between Plans
  • improve comparability, where applicable, between
    Plans and direct investment in mutual funds

24
529 Plans What You Should KnowIssues Disclosure
  • VOLUNTARY CSPN GUIDELINES
  • Establish a framework for disclosure and specify
    information that should be prominently stated,
    such as
  • the lack of any state guarantee
  • the need to consider state tax treatment and
    other state-specific benefits
  • the availability of other state 529 programs.

25
529 Plans What You Should KnowIssues Fees
Commissions
  • All 529 plans charge fees and expenses.These
    costs not only vary among 529 plans but also can
    vary within a single 529 plan. Fees may include
  • enrollment charges
  • annual maintenance fees
  • sales loads
  • deferred sales charges paid when investors
    withdraw their money
  • administration and management fees and
    underlying fund expenses.

26
529 Plans What You Should KnowIssues Fees
Commissions
  • Advisor-sold plans often cost more than
    direct-sold plans.
  • Some broker-sold college savings plans, like some
    mutual funds, have different share classes (Class
    A, B, C, etc). Each class has different fees and
    expenses.

27
529 Plans What You Should KnowIssues Fees
Commissions
  • MSRB Rule G-30(b), on prices and commissions in
    agency transactions, prohibits broker-dealers
    from selling municipal securities to a customer
    for a commission or service charge in excess of a
    fair and reasonable amount.
  • Whats fair and reasonable?

28
529 Plans What You Should KnowIssues Fees
Commissions
  • MSRB Rule G-30(b)rule provides for considering a
    number of relevant factors, including
  • the expense of executing the order
  • the value of services provided, and
  • the amount of any other compensation received by
    the broker-dealer from others (such as thestate
    plan or the primary distributor).

29
529 Plans What You Should KnowIssues
Suitability
  • MSRB Rule G-19 requires a broker-dealer that
    recommends to a customer an investment in a 529
    college savings plan to have reasonable grounds
    for believing that the recommendation is
    suitable, based on information available about
    the investment and information on the customers
    financial status, tax status, investment
    objectives and other relevant information.

30
529 Plans What You Should KnowIssues
Suitability
  • SUITABILITY ON THREE LEVELS
  • 529 Plans vs. other investment alternatives
  • In-state plan sales vs. out-of-state plan sales
  • Underlying investments

31
529 Plans What You Should KnowIssues
Suitability
  • The MSRB has stated that broker-dealers must
    remember that 529 Plans are designed for a
    particular purpose and this purpose should match
    the customers investment objective.
  • For example, broker-dealers should bear in mind
    potential tax consequences for customers who
    invest in a 529 Plan but may not intend to use
    the funds for qualified higher education
    expenses.

32
529 Plans What You Should KnowIssues
Suitability
  • Other factors to consider to determine
    suitability
  • The age of the accounts designated beneficiary
  • The number of years until funds will be needed to
    pay qualified higher education expenses.

33
529 Plans What You Should KnowIssues
Suitability
  • Broker-dealers must consider the appropriate
    share class for a particular customer.
  • The number of years until withdrawals are
    expected to be made can be a significant factor
    in determining which share class would be
    suitable for the particular customer.
  • Broker-dealers also are prohibited from
    recommending excessive or frequenttransactions .

34
529 Plans What You Should KnowIssues Sales
Practices
  • PROBLEM AREA Sales of out-of-state plans.
  • In 2003, the NASD conducted a review of sales
    practices used by broker-dealers to market 529
    Plans.
  • The review focused on six firms, based on the
    number of customer complaints and sales volume.

35
529 Plans What You Should KnowIssues Sales
Practices
  • Preliminary NASD Sweep Findings
  • During the review period, the firms sold
    approximately 2.1 billion worth of 529 plans.
  • The vast majority of sales were made to residents
    outside of the state that sponsored the 529 plan.

36
529 Plans What You Should KnowIssues Sales
Practices
  • Preliminary NASD Sweep Findings
  • More than 90 percent of the sales by some of
    those firms were to out-of-state residents,
    despitethe fact that about half of the states
    give astate tax deduction to their citizens for
    contributions to the home state's 529 plan.

37
529 Plans What You Should KnowResources for
Regulators
  • College Savings Plan Network

The College Savings Plans Network formed in 1991
as an affiliate to the National Association of
State Treasurers. CSPN serves as a clearinghouse
for information among existing college savings
programs. Additionally, CSPN monitors federal
activities and promotes legislation that will
positively affect state programs.
www.collegesavings.org
38
529 Plans What You Should KnowResources for
Regulators
  • Municipal Securities Rulemaking Board

The MSRB was established in 1975 by Congress to
develop rules regulating securities firms and
banks involved in underwriting, trading, and
selling municipal securities. Composed of members
from the municipal securities dealer community
and the public, MSRB sets standards for all
municipal securities dealers. MSRB is is a
self-regulatory organization that is subject to
SEC oversight.
www.msrb.org
39
529 Plans What You Should KnowResources for
Regulators
  • Saving for College.com

Savingforcollege.com LLC offers independent and
objective information about 529 plans and other
ways to save and pay for college. The website,
operated by founder Joseph Hurley CPA, is
designed to help individuals and professional
advisers better understand 529 Plans and is not
affiliated by ownership with any other company or
organization.
www.savingforcollege.com
40
529 Plans What You Should KnowResources for
Regulators
NASAA, along with the College Savings Plan
Network and the Investment Company Institute,
have published A Guide to Understanding 529
Plans. The brochure is available on the NASAA
website in the Investor Education Sections
Financial Education Resources page.
www.nasaa.org/investor_education/Financial_Educati
on_Resources
41
529 Plans What You Should Know
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