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The anti-529ers revisited: Haters gonna hate
http://www.savingforcollege.com/articles/the-anti-529ers-revisited-haters-gonna-hate-1036

Posted: 2017-02-23

by Brian Boswell

Financial Professional Content

If the rise of the internet has taught us anything, it's that for every great thing that happens there is a hater. 529 plans are the best thing available to college savers. This not to say that the Coverdell Education Savings Account or UGMA/UTMA accounts are completely without merit, only that for the average college saver a 529 plan is going to offer more benefits in terms of potential returns, benefits and versatility than other options. However, there are always a few financial professionals that, for one reason or another, insist that 529 plans are terrible investments.

  • "Why 97% of People Don't Use 529 College Savings Plans" -Bloomberg
  • "Middle Class Tax Plan Scams Middle Class" -The Daily Beast
  • "529 college savings plans are everything that is wrong with American policy" -The Week
  • "529 Rebels: Alternative Ways to Save for College" -CNBC
  • "3 Reasons Not to Open a 529 Plan" -The Motley Fool

Reading through these articles and independent blogs from financial advisors, you come to the conclusion that the biggest problems financial professionals have with 529 plans are:

529 plans are only for the wealthy

Most detractors that state this cite the 2012 Government Accountability Office (GAO) Study, "A Small Percentage of Families Save in 529 Plans." This study uses data from 2010, and confirmed what many in the 529 industry already knew: Only a small percentage of college savers used 529 plans. The more troubling item was the conclusions drawn by the SAO, specifically that, "As currently designed, 529 college savings plans benefit a small percentage of U.S. families. In general these families tend to be wealthier than others. It is not clear whether the $1.6 billion in federal tax expenditures that these plans represent strategically targets limited federal resources."

The problems with the study were numerous, and have since been refuted using better data from the industry itself, among other reasons. But there are bigger problems with the conclusions drawn by the GAO Study beyond data sample issues and stale information. Even if the data were correct, the study repeatedly uses the false assumption that because 529 plans are not used by low-income individuals (not true), or that because they were used by high net worth individuals, that 529 plans were somehow not worthy of support at the federal level.

But college is, for most people, estimated to be the largest single expense outside buying their first home, and is still a burden even for the wealthy. Individuals with over $125,000 in annual income qualify for half the financial aid as those below the threshold and, fair enough, that aid is there for low-income Americans that otherwise would not have access to college. But 529 plans enable those with the potential means a vehicle to make it possible for them to fund their own education.

Even so, 529 plans are certainly not exclusively the province of the wealthy. Prior barriers to their utility, such as flat annual fees or high expenses, have come down dramatically in the past 20 years. While still somewhat complex, most plans are relatively straightforward for most people to use in terms of depositing assets and electing an age-based portfolio. Plus, there increasingly incentives for low-income savers to get matching grants and other aid from their respective state sponsor. The challenge that remains is to educate the general population, and increase utility among the average college saver, though this is nothing new.

Nobody uses the plans

This is a critique you will read over and over, and a constant frustration to plan providers and college savings pundits. Yes: Not many people use 529 plans, we know. But the fact that 529 plans haven't been as popular as they should doesn't have any bearing on the viability of the plans themselves. Popularity does not correlate to potential. The Daily Beast article cited above states, "The average saver has a little more than $20,000 in their 529 account, which would cover maybe the first year of a public four-year college in most states." So what? It wasn't long ago that the average was closer to $10,000 and, indeed, this should be encouraging. But even if it's not enough to fund a full college education, what this amount tells us is that the average amount has been increasing and that there is more work to be done in terms of increasing adoption of 529 plans by savers.

529 plans are too restrictive

" a combination of withdrawal restrictions and sluggish investment performance make 529s less attractive to investment pros." says CNBC. The question is: If withdrawals are too restrictive, how would you design a college savings plan that is more versatile, while ensuring it wasn't abused as a tax shelter? Or better yet, what alternate vehicle is better for college savings than a 529? At that point this becomes an exercise in comparing the pros and cons of the various college savings vehicles, at which point 529 plans usually though not always win out.

Related: Compare savings options

529 plans are too expensive

This is a constant complaint about 529 plans that was once valid- over 15 years ago. 529 plans are less expensive than ever and keep getting cheaper. Prepaid plans have zero expenses, and there are some savings plans that have zero costs for select portfolios. Most plans have index funds if not exclusively, that at least some number available as an option, or alongside other funds to bring down overall costs.

Take the New York Direct Plan, for example. It's one of the least expensive savings plans available at 16 basis points all-in, and has no annual fees. By comparison, the asset-weighted expense ratio across all mutual funds in 2014 was 0.64%, and the straight average was 1.19% according to Morningstar. So while there may be more expensive plans out there, the argument that 529s are, in general, too expensive is not valid.

Article inspired by the original article by Joseph Hurley

Financial Professional Content

If the rise of the internet has taught us anything, it's that for every great thing that happens there is a hater. 529 plans are the best thing available to college savers. This not to say that the Coverdell Education Savings Account or UGMA/UTMA accounts are completely without merit, only that for the average college saver a 529 plan is going to offer more benefits in terms of potential returns, benefits and versatility than other options. However, there are always a few financial professionals that, for one reason or another, insist that 529 plans are terrible investments.

  • "Why 97% of People Don't Use 529 College Savings Plans" -Bloomberg
  • "Middle Class Tax Plan Scams Middle Class" -The Daily Beast
  • "529 college savings plans are everything that is wrong with American policy" -The Week
  • "529 Rebels: Alternative Ways to Save for College" -CNBC
  • "3 Reasons Not to Open a 529 Plan" -The Motley Fool

Reading through these articles and independent blogs from financial advisors, you come to the conclusion that the biggest problems financial professionals have with 529 plans are:

529 plans are only for the wealthy

Most detractors that state this cite the 2012 Government Accountability Office (GAO) Study, "A Small Percentage of Families Save in 529 Plans." This study uses data from 2010, and confirmed what many in the 529 industry already knew: Only a small percentage of college savers used 529 plans. The more troubling item was the conclusions drawn by the SAO, specifically that, "As currently designed, 529 college savings plans benefit a small percentage of U.S. families. In general these families tend to be wealthier than others. It is not clear whether the $1.6 billion in federal tax expenditures that these plans represent strategically targets limited federal resources."

The problems with the study were numerous, and have since been refuted using better data from the industry itself, among other reasons. But there are bigger problems with the conclusions drawn by the GAO Study beyond data sample issues and stale information. Even if the data were correct, the study repeatedly uses the false assumption that because 529 plans are not used by low-income individuals (not true), or that because they were used by high net worth individuals, that 529 plans were somehow not worthy of support at the federal level.

But college is, for most people, estimated to be the largest single expense outside buying their first home, and is still a burden even for the wealthy. Individuals with over $125,000 in annual income qualify for half the financial aid as those below the threshold and, fair enough, that aid is there for low-income Americans that otherwise would not have access to college. But 529 plans enable those with the potential means a vehicle to make it possible for them to fund their own education.

Even so, 529 plans are certainly not exclusively the province of the wealthy. Prior barriers to their utility, such as flat annual fees or high expenses, have come down dramatically in the past 20 years. While still somewhat complex, most plans are relatively straightforward for most people to use in terms of depositing assets and electing an age-based portfolio. Plus, there increasingly incentives for low-income savers to get matching grants and other aid from their respective state sponsor. The challenge that remains is to educate the general population, and increase utility among the average college saver, though this is nothing new.

Nobody uses the plans

This is a critique you will read over and over, and a constant frustration to plan providers and college savings pundits. Yes: Not many people use 529 plans, we know. But the fact that 529 plans haven't been as popular as they should doesn't have any bearing on the viability of the plans themselves. Popularity does not correlate to potential. The Daily Beast article cited above states, "The average saver has a little more than $20,000 in their 529 account, which would cover maybe the first year of a public four-year college in most states." So what? It wasn't long ago that the average was closer to $10,000 and, indeed, this should be encouraging. But even if it's not enough to fund a full college education, what this amount tells us is that the average amount has been increasing and that there is more work to be done in terms of increasing adoption of 529 plans by savers.

529 plans are too restrictive

" a combination of withdrawal restrictions and sluggish investment performance make 529s less attractive to investment pros." says CNBC. The question is: If withdrawals are too restrictive, how would you design a college savings plan that is more versatile, while ensuring it wasn't abused as a tax shelter? Or better yet, what alternate vehicle is better for college savings than a 529? At that point this becomes an exercise in comparing the pros and cons of the various college savings vehicles, at which point 529 plans usually though not always win out.

Related: Compare savings options

529 plans are too expensive

This is a constant complaint about 529 plans that was once valid- over 15 years ago. 529 plans are less expensive than ever and keep getting cheaper. Prepaid plans have zero expenses, and there are some savings plans that have zero costs for select portfolios. Most plans have index funds if not exclusively, that at least some number available as an option, or alongside other funds to bring down overall costs.

Take the New York Direct Plan, for example. It's one of the least expensive savings plans available at 16 basis points all-in, and has no annual fees. By comparison, the asset-weighted expense ratio across all mutual funds in 2014 was 0.64%, and the straight average was 1.19% according to Morningstar. So while there may be more expensive plans out there, the argument that 529s are, in general, too expensive is not valid.

Article inspired by the original article by Joseph Hurley

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