COLLEGE SAVINGS 101

Savingforcollege.com

5 college planning questions to ask during annual reviews
http://www.savingforcollege.com/articles/529-savings-and-your-annual-client-review-1070

Posted: 2017-06-13

by Brian Boswell

Financial Professional Content

For advisors, every client requires a different amount of attention. Some are easygoing and others check their account balances daily, but at a minimum advisors typically have one major meeting each year to review the progress of their client towards their respective financial goals, and to adjust that plan based on any changes that may have occurred. College savings fits into that discussion, and you'll want to make sure you're raising these college savings topics in those meetings. The first question is, are they already saving?

How's life?

The real question here is whether anything has changed that would impact their education savings goals. New babies, a death in the family, moving to a new home, buying a vacation house, changes in medical status- a lot can happen in a year. This is a question most every advisor already asks, but you need to keep college savings in mind while asking.

For example, the account owner for a 529 beneficiary that became disabled over the year would be able to take advantage of an exclusion to the 10% withdrawal penalty. So if they're in financial duress as a result, it might make sense to draw down on those 529 assets rather than a taxable account or retirement account. Or, if there was a death, there might be an inheritance that could be used to fund or superfund a 529 account for their child or children.

Are you saving enough?

While there is a lucky subset of people that can pre-fund their college education, and top out their accounts, most people - even high net worth investors may not have sufficient investable assets or income to contribute enough to fully fund the expected cost of a higher education. To fully-fund the expected cost of a private four-year school for a newborn would mean putting away $833 a month using the basic assumptions of our Family College Savings Roadmap. Add another child that's three, and you're adding another $962 a month.

So this is an important item to revisit. If your client is not saving enough, could they be? A 2016 study from Fidelity showed that half of parents with children in tenth grade or higher could have saved at least $50 more a month, in retrospect, adding up to an additional $20,000 in savings over 18 years.

Projected costs also change over time, so use the tools available to you through Savingforcollege.com in conversations with your clients to determine how much they should ideally be saving, and the cost of waiting. Our "Price of Procrastination" tool can be used to show clients visually how much more they would have to contribute by putting off saving more today.

5 college planning questions to ask during annual reviews chart

Are you maximizing your tax benefits?

Every state is different, and the 529 landscape is constantly changing, so it's important to review with your client what tax benefits may or may not be available to them. Many states introduce or repeal benefits on a regular basis or, in some states, the tax deduction is adjusted annually based on an inflation index.

For example, if you work out of Massachusetts there has never been an in-state tax benefit for using the home state plan. However, last year the state passed a bill giving residents a $1,000 tax deduction ($2,000 if married filing jointly) for contributions to the state plan, U.Fund. Massachusetts only offers a direct-sold plan, so it requires some additional legwork on the part of the advisor when talking about tax benefits with clients that have college savings goals.

These benefits can also expire, as they did in Maine. The State repealed the $250 tax deduction formerly available to residents starting in 2016. The Massachusetts example above? That benefit will expire in 2021.

So be sure to review the amount your clients are contributing and the amount of the state tax deduction, if available, on a regular basis (and check back here at Savingforcollege.com to make sure!).

Are your clients still using the right underlying investments?

An advisor recently told me about a client from a couple of years back, who had been invested in the DC plan when it was administered by Calvert. This client wanted to exit the product because they no longer wanted socially-responsible investments (SRI). It turns out that the client's spouse had insisted on using SRIs, and since the client was getting a divorce, they wanted to switch plans.

With 529s as with mutual funds, variable annuities, and other packaged investment products the underlying investments can vary dramatically from plan to plan. Even if a plan hasn't changed, your client may have. Their risk profile will shift over time, and life events may cause them to become more conservative or aggressive. Historically, studies have shown most assets in 529 plans are invested in age-based options; generally in the 80% range. This is typical not just of direct-sold plans, but advisor-sold plans, too.

This isn't necessarily a bad thing; age-based products can be a simple solution to the need for a long-term diversified investment in a product that limits reallocations to twice per year. However, age-based products vary widely in the amount of equity they hold at any given point in the investment's timeline. Some 529 plans hold zero equity in their "college age" portfolios, while others may hold 15% or more. Most advisor-sold products will have individual portfolio options to allow you to tweak the overall asset allocation of the client. So if their age-based product were too aggressive, for example, consider selling a percentage and reallocating to a fixed-income or cash-equivalent option in the program. Just be careful to check that they have not already used both of their annual reallocations.

So whether your client needs to reallocate due to changes in their risk tolerance or investment preferences, it's important to have the discussion at least annually to ensure they are invested in the right underlying securities.

What would you consider "Success!" when we meet next year?

This can be a very simple question, but it's an important one to ask, because it may uncover hidden anxieties or goals that would otherwise not arise in organic conversation. You can ask what's changed over the past year, but when you ask your client to picture where they will be in a year, it changes their perspective, forcing them to consider themselves outside the context of now.

Data output from the Family College Savings Road Map

The answer may just be that your client wants to be meeting or exceeding their projected savings goals. But that gives you the opportunity to ask again what it means for them if they do not. These are not guaranteed investments- so what happens if they do not meet the projections? What happens if they lose money? This is in many ways a redundant risk assessment question, but an important one.

Investors do not view college savings assets in the same way as their retirement assets. For most, this money already belongs to the beneficiary, and losing money can often feel like failing their loved one- even if they never know. In many cases clients are more conservative with college savings investing than their own retirement for this reason.

Financial Professional Content

For advisors, every client requires a different amount of attention. Some are easygoing and others check their account balances daily, but at a minimum advisors typically have one major meeting each year to review the progress of their client towards their respective financial goals, and to adjust that plan based on any changes that may have occurred. College savings fits into that discussion, and you'll want to make sure you're raising these college savings topics in those meetings. The first question is, are they already saving?

How's life?

The real question here is whether anything has changed that would impact their education savings goals. New babies, a death in the family, moving to a new home, buying a vacation house, changes in medical status- a lot can happen in a year. This is a question most every advisor already asks, but you need to keep college savings in mind while asking.

For example, the account owner for a 529 beneficiary that became disabled over the year would be able to take advantage of an exclusion to the 10% withdrawal penalty. So if they're in financial duress as a result, it might make sense to draw down on those 529 assets rather than a taxable account or retirement account. Or, if there was a death, there might be an inheritance that could be used to fund or superfund a 529 account for their child or children.

Are you saving enough?

While there is a lucky subset of people that can pre-fund their college education, and top out their accounts, most people - even high net worth investors may not have sufficient investable assets or income to contribute enough to fully fund the expected cost of a higher education. To fully-fund the expected cost of a private four-year school for a newborn would mean putting away $833 a month using the basic assumptions of our Family College Savings Roadmap. Add another child that's three, and you're adding another $962 a month.

So this is an important item to revisit. If your client is not saving enough, could they be? A 2016 study from Fidelity showed that half of parents with children in tenth grade or higher could have saved at least $50 more a month, in retrospect, adding up to an additional $20,000 in savings over 18 years.

Projected costs also change over time, so use the tools available to you through Savingforcollege.com in conversations with your clients to determine how much they should ideally be saving, and the cost of waiting. Our "Price of Procrastination" tool can be used to show clients visually how much more they would have to contribute by putting off saving more today.

5 college planning questions to ask during annual reviews chart

Are you maximizing your tax benefits?

Every state is different, and the 529 landscape is constantly changing, so it's important to review with your client what tax benefits may or may not be available to them. Many states introduce or repeal benefits on a regular basis or, in some states, the tax deduction is adjusted annually based on an inflation index.

For example, if you work out of Massachusetts there has never been an in-state tax benefit for using the home state plan. However, last year the state passed a bill giving residents a $1,000 tax deduction ($2,000 if married filing jointly) for contributions to the state plan, U.Fund. Massachusetts only offers a direct-sold plan, so it requires some additional legwork on the part of the advisor when talking about tax benefits with clients that have college savings goals.

These benefits can also expire, as they did in Maine. The State repealed the $250 tax deduction formerly available to residents starting in 2016. The Massachusetts example above? That benefit will expire in 2021.

So be sure to review the amount your clients are contributing and the amount of the state tax deduction, if available, on a regular basis (and check back here at Savingforcollege.com to make sure!).

Are your clients still using the right underlying investments?

An advisor recently told me about a client from a couple of years back, who had been invested in the DC plan when it was administered by Calvert. This client wanted to exit the product because they no longer wanted socially-responsible investments (SRI). It turns out that the client's spouse had insisted on using SRIs, and since the client was getting a divorce, they wanted to switch plans.

With 529s as with mutual funds, variable annuities, and other packaged investment products the underlying investments can vary dramatically from plan to plan. Even if a plan hasn't changed, your client may have. Their risk profile will shift over time, and life events may cause them to become more conservative or aggressive. Historically, studies have shown most assets in 529 plans are invested in age-based options; generally in the 80% range. This is typical not just of direct-sold plans, but advisor-sold plans, too.

This isn't necessarily a bad thing; age-based products can be a simple solution to the need for a long-term diversified investment in a product that limits reallocations to twice per year. However, age-based products vary widely in the amount of equity they hold at any given point in the investment's timeline. Some 529 plans hold zero equity in their "college age" portfolios, while others may hold 15% or more. Most advisor-sold products will have individual portfolio options to allow you to tweak the overall asset allocation of the client. So if their age-based product were too aggressive, for example, consider selling a percentage and reallocating to a fixed-income or cash-equivalent option in the program. Just be careful to check that they have not already used both of their annual reallocations.

So whether your client needs to reallocate due to changes in their risk tolerance or investment preferences, it's important to have the discussion at least annually to ensure they are invested in the right underlying securities.

What would you consider "Success!" when we meet next year?

This can be a very simple question, but it's an important one to ask, because it may uncover hidden anxieties or goals that would otherwise not arise in organic conversation. You can ask what's changed over the past year, but when you ask your client to picture where they will be in a year, it changes their perspective, forcing them to consider themselves outside the context of now.

Data output from the Family College Savings Road Map

The answer may just be that your client wants to be meeting or exceeding their projected savings goals. But that gives you the opportunity to ask again what it means for them if they do not. These are not guaranteed investments- so what happens if they do not meet the projections? What happens if they lose money? This is in many ways a redundant risk assessment question, but an important one.

Investors do not view college savings assets in the same way as their retirement assets. For most, this money already belongs to the beneficiary, and losing money can often feel like failing their loved one- even if they never know. In many cases clients are more conservative with college savings investing than their own retirement for this reason.

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