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COLLEGE SAVINGS 101
529 suitability and state borders
http://www.savingforcollege.com/articles/529-suitability-and-state-borders
Posted: 2002-12-16
So you think your client could benefit from a 529 plan? Tax-deferred earnings, tax-free withdrawals, estate reduction, control—all these things make the 529 plan an attractive choice for parents and grandparents (particularly those with high income) looking to put aside some dollars for college. What's more, you now have access to a number of excellent 529 plans that are designed for distribution through brokers.
But when your client's home state offers its own 529 plan that is direct-sold, or is broker-sold but not available through your own broker-dealer, you may have a problem. The state may be offering financial incentives to its residents, such as state income tax deductions for contributions, that don't come with your out-of-state 529 product.
My advice: Be extra cautious.
You and your broker-dealer must look to the rules of the Municipal Securities Rulemaking Board (MSRB), the self-regulatory organization that regulates dealer sales of "municipal fund securities", including 529 plans. The MSRB has been active in developing new requirements for dealers who sell these investments, and the rules require careful handling of current and potential clients.
Two rules from the MSRB Rule Book—G-17 and G-19—are especially important. Rule G-17 mandates that dealers deal fairly with customers. With respect to a customer investing in an out-of-state 529 college savings plan, the dealer is obligated to inform the customer that, depending upon the laws of the customer's home state, favorable state tax treatment for investing in a 529 college savings plan may be limited to investments made in a plan offered by the customer's home state.
Rule G-19 relates to suitability of recommendations and transactions. It requires that dealers make reasonable efforts to obtain information concerning a customer's financial status, tax status and investment objectives, as well as any other information reasonable and necessary in making a recommendation of a 529 plan.
Handling these requirements for your individual clients should not be a problem. You are accustomed to opening new account relationships and administering "suitability" questionnaires. And the disclosure regarding state tax treatment for out-of-state 529 plans required under Rule G-17 seems fairly general and is usually already contained in official program disclosures. Be sure your client correctly understands this warning. In fact, you will probably want to be more specific with your client when evaluating any lost state-level benefits resulting from an investment in out-of-state 529 plans (without offering tax advice).
But what happens if you want to market 529 plans through employers to reach many employees at one time? Are you required to administer a suitability questionnaire to each employee signing up for a 529 plan via payroll deduction? Must you raise the state tax issue at every general informational and enrollment meeting?
The answer to each of these questions seems to be "yes," but only if you are in fact making a recommendation of a 529 plan to any employee or to the employee group as a whole. This conclusion comes from a reading of the MSRB's recently-released Draft Interpretive Notice on Marketing of 529 College Savings Plan Employee Payroll Deduction Programs.
The draft notice advises that you, as introducing broker, are fully obligated to make a suitability determination under Rule G-19. In addition, the disclosure regarding differential state income tax benefits must be made not only to the employee, but also to the employer.
These consumer-protection rules represent another reason why selling the "workplace 529" is not as easy as it might first appear. (Other reasons include low participation rates, as employees can enroll directly in 529 plans outside the workplace; low-balance accounts for those who do enroll; and the confusion and uncertainty surrounding 529 plans.) MSRB is inviting comments on the draft notice and asking that they be submitted by January 10, 2003.
If you are not making a recommendation to customers, Rule G-19 does not apply, and a suitability determination is not necessary. How do you know if your activities amount to a "recommendation"? Simple. Ask your compliance department.
So you think your client could benefit from a 529 plan? Tax-deferred earnings, tax-free withdrawals, estate reduction, control—all these things make the 529 plan an attractive choice for parents and grandparents (particularly those with high income) looking to put aside some dollars for college. What's more, you now have access to a number of excellent 529 plans that are designed for distribution through brokers.
But when your client's home state offers its own 529 plan that is direct-sold, or is broker-sold but not available through your own broker-dealer, you may have a problem. The state may be offering financial incentives to its residents, such as state income tax deductions for contributions, that don't come with your out-of-state 529 product.
My advice: Be extra cautious.
You and your broker-dealer must look to the rules of the Municipal Securities Rulemaking Board (MSRB), the self-regulatory organization that regulates dealer sales of "municipal fund securities", including 529 plans. The MSRB has been active in developing new requirements for dealers who sell these investments, and the rules require careful handling of current and potential clients.
Two rules from the MSRB Rule Book—G-17 and G-19—are especially important. Rule G-17 mandates that dealers deal fairly with customers. With respect to a customer investing in an out-of-state 529 college savings plan, the dealer is obligated to inform the customer that, depending upon the laws of the customer's home state, favorable state tax treatment for investing in a 529 college savings plan may be limited to investments made in a plan offered by the customer's home state.
Rule G-19 relates to suitability of recommendations and transactions. It requires that dealers make reasonable efforts to obtain information concerning a customer's financial status, tax status and investment objectives, as well as any other information reasonable and necessary in making a recommendation of a 529 plan.
Handling these requirements for your individual clients should not be a problem. You are accustomed to opening new account relationships and administering "suitability" questionnaires. And the disclosure regarding state tax treatment for out-of-state 529 plans required under Rule G-17 seems fairly general and is usually already contained in official program disclosures. Be sure your client correctly understands this warning. In fact, you will probably want to be more specific with your client when evaluating any lost state-level benefits resulting from an investment in out-of-state 529 plans (without offering tax advice).
But what happens if you want to market 529 plans through employers to reach many employees at one time? Are you required to administer a suitability questionnaire to each employee signing up for a 529 plan via payroll deduction? Must you raise the state tax issue at every general informational and enrollment meeting?
The answer to each of these questions seems to be "yes," but only if you are in fact making a recommendation of a 529 plan to any employee or to the employee group as a whole. This conclusion comes from a reading of the MSRB's recently-released Draft Interpretive Notice on Marketing of 529 College Savings Plan Employee Payroll Deduction Programs.
The draft notice advises that you, as introducing broker, are fully obligated to make a suitability determination under Rule G-19. In addition, the disclosure regarding differential state income tax benefits must be made not only to the employee, but also to the employer.
These consumer-protection rules represent another reason why selling the "workplace 529" is not as easy as it might first appear. (Other reasons include low participation rates, as employees can enroll directly in 529 plans outside the workplace; low-balance accounts for those who do enroll; and the confusion and uncertainty surrounding 529 plans.) MSRB is inviting comments on the draft notice and asking that they be submitted by January 10, 2003.
If you are not making a recommendation to customers, Rule G-19 does not apply, and a suitability determination is not necessary. How do you know if your activities amount to a "recommendation"? Simple. Ask your compliance department.
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One-year rankings are based on a plan's average investment returns over the last 12 months.
State | Plan Name | |
---|---|---|
1 | Nevada | USAA 529 Education Savings Plan |
2 | Florida | Florida 529 Savings Plan |
3 | New Jersey | NJBEST 529 College Savings Plan |
Three-year rankings are based on a plan's average annual investment returns over the last three years.
State | Plan Name | |
---|---|---|
1 | South Dakota | CollegeAccess 529 (Direct-sold) |
2 | Wisconsin | Edvest 529 |
3 | Nevada | USAA 529 Education Savings Plan |
Five-year rankings are based on a plan's average annual investment returns over the last five years
State | Plan Name | |
---|---|---|
1 | Indiana | CollegeChoice 529 Direct Savings Plan |
2 | Florida | Florida 529 Savings Plan |
3 | Alaska | T. Rowe Price College Savings Plan |
10-year rankings are based on a plan's average annual investment returns over the last ten years.
State | Plan Name | |
---|---|---|
1 | West Virginia | SMART529 WV Direct College Savings Plan |
2 | South Carolina | Future Scholar 529 College Savings Plan (Direct-sold) |
3 | Ohio | Ohio's 529 Plan, CollegeAdvantage |