State of the Industry: $63+ Billion in 529 Plan Assets – Good News or Bad News?

by: Arman Rousta, Founder & CEO of 401kid.com

Here is a classical lesson in investor non-education. People really want to do the right thing, I believe that in my heart. But how many times do we have to “learn? the same lesson in order to truly integrate the knowledge into a better way of doing things? Between the stock market crash of 2000, current real estate boom, and throughout American history, it seems as if people have short-term memories that drive them back into risky investments, without truly understanding or accepting accountability for what they are getting into. As soon as something goes wrong, everyone cries foul and starts to point fingers. Well, with over $63 billion now invested in 529 college savings plans, and some controversy surrounding these plans, it is time for investors to look in the mirror and try to understand what they are getting involved in.

The 2001 federal legislation that rendered an obscure IRS tax code called Section 529 tax-free has spawned over 80 professionally managed plans and 1,000 investment options. Thanks to a great media blitz and millions of marketing dollars by big fund managers, there are now over 7 million 529 Plan accounts, with the aforementioned $63 billion in assets, all in under four years. Based on results from 401kid, Inc., an SEC-Registered Investment Advisor, whereby hundreds of thousands of people have accessed and utilized the 401kid.com website, it’s financial calculators and personalized investment advice engine, it is estimated that over 85% of 529 plan account holders are improperly allocated in their college savings plans. That is scary.

First of all, let’s explain what “improperly allocated? means in this case, and to what degree investors are off track. Then we can get into where, how and why people are going wrong, and how they can seize control and make it right. Improper allocation starts with the selection of plans. Why are people making the “wrong? choices when it comes to 529 plans? The answer is simple, and all too familiar – lack of investor education and marketing misinformation. Choosing one or more 529 plans can be a daunting task, despite the plethora of information now available from different sources. The fact is, most people are uneducated investors. Further, they have limited time to research and truly grasp the nuances of various plans. At some point along the way, they are forced to trust someone and take advice from some source or the other, be it an advisor, their employer, neighbors or the media. It is disturbing to see the plans and asset allocations that many people come in with, which tells us that there is a breakdown somewhere in the evaluation process. We have only scratched the surface on how and where that breakdown occurs. More on that topic over the coming weeks.

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The tale of two athletes

I was a recruited scholar athlete coming out of high school. Fortunately, I played football, the sport which provides the largest number of scholarships (currently 85 athletic scholarships, or 3.9 scholarships per starter at DI schools). I received many full scholarship offers. I did not realize until later that the number of scholarships offers had more to do with the sport that I played than with athletic talent.

My daughter plays high school soccer and is recruited scholar athlete. She is likely a more accomplished athlete than her dad! Even if she is considered one of the best soccer players in the nation and is recruited by the very best women’s soccer programs, it is improbable that she will be offered a full athletic scholarship. Women Soccer Coaches have only 1.1 athletic scholarships per starter at most to distribute among freshman, sophomore, junior and senior recruits. Only partial athletic scholarships (e.g., one quarter scholarship) are generally available for ”˜non-revenue producing sports’ like soccer as coaches attempt to stretch their scholarship budgets as much as possible.

The NCAA establishes the maximum number of athletic scholarships available per sport (see below table). For sports with more than two scholarships per starter (e.g., basketball, football and hockey), full scholarships are generally available to student athletes for these ”˜revenue producing sports’. However, for sports with less than two scholarships per starter (e.g., baseball, field hockey, lacrosse and soccer), only partial scholarships (e.g., one quarter scholarship) are generally available for these ”˜non-revenue producing sports’. Please note that maximum amount is not what is actually available at every school. In most cases, very few schools will be able to offer the maximum amount of scholarships for all the sports that they support for cost and Title IX reasons. In addition, Division 3 and Ivy League Schools have elected not to offer athletic scholarships.

If your child has the ability and commitment to play on the intercollegiate level, one must be realistic about the full athletic scholarship potential even from Division 1 schools. This is a very important consideration in developing an Educational Savings Plan (ESP). Prudent parents will plan and save accordingly.

For instance, should a family prudently save for their child’s education in a state sponsored 529 plan and their child receives a full athletic scholarship, these funds may be withdrawn from the 529 plan without penalty. These funds could be applied to another child’s education, the parent’s retirement, etc. Therefore, it is all upside with no downside for families who implement an Educational Savings Plan (ESP).

Author: Bob Lally

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Come see 401kid President, Arman Rousta, speak during a segment of CNNfn’s Your Money, hosted by Ali Velshi. On the East Coast, airtime for Your Money is between 5 – 5:30pm. Check your local listings for details. Arman will address the big question that everyone wants to know when it comes to college planning – which are the best 529 plans? As you will see, the truth is, it depends on who you are and what you are looking for! Join us in supporting Arman and feel free to send feedback to 401kid after seeing the show. Thank you for your support!

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This years 10.5% increase in average tuition and fees at four-year public institutions is a welcoming sign that students and families will get a little financial respite from the state budgeting offices. This lower rate compares to 14.1% in the previous year, which represented the highest rate increase in thirty years.

Many analysts believe that the economic cycle has come to a full circle and that spending on higher education can make up for the years of budget cuts, which has been increasingly squeezed out by state spending on healthcare, K-12, and prison. But others are not so sure. They contend that the damage has been done and, increasingly, public college and university presidents wish to increase their financial independence from state oversight by seeking charter status.

The critics point to the fact that at many institutions, tuition and fees continue to increase at a rate higher than historic figures. At the University of Hawaii at Manoa, for instance, it plans to increase its tuition and fees by as much as 50 percent over the next five years; in Colorado, where state fiscal conditions still have not rebounded substantially, tuition and fees are expected to increase by over 20% on some campuses in one year. Though the average tuition increase is lower than a year before, the burden of payment on students and families is still very high inasmuch as tuition and fees do not uniformly moderate as from the year’s past.

Author: Young Kim – 401kid, Education Advisor

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With the cost of traditional education reaching astronomical proportions, it is time to start considering alternatives more seriously. Distance learning has been gaining momentum over the past several years, as a viable complement or replacement for traditional institutions of higher education. Bravo. The true value of this growing field of education goes beyond the financial impact. Convenience, flexibility and freedom are three intangible short and long-term benefits of distance learning that should be considered when approaching the question of higher education.

Convenience, in that a student can study without travelling to classrooms, thereby saving time.

Flexibility, in that the student can study any time of the day or night, around a work schedule and other activities. There are typically no definitive timelines for completion of studies, which can work both for or against the student depending on their discipline.

Freedom, in that students do not have to be bound to huge financial debt burdens during and after college, which can take a psychological toll on them. What happens after college is that the debt-riddled grads hastily jump at income-producing jobs rather than trying to discover what they truly want to do with their lives. As a result, the corporate handcuffs come on, and the young grad engages in the all too familiar pattern of working to live, pay bills and pay off debts, which typically carry forward into their late 30s or early 40s.

I myself am taking a CFP Course through Kaplan College, which costs $2,500. Now this designation will enable me to practice financial planning as well as other financial services disciplines. I know others who are taking healthcare courses, accounting, etc. mostly with positive results. There are a lot of different ways to learn. Learning is not confined to the walls of higher education institutions, by any means. While I fully respect the value of an education, I applaud and encourage the growth in distance learning. Like all new technologies, I predict that distance learning will shatter the current scheme of things in the education industry in the coming years, unleashing more dynamic, creative, flexible and cost-effective education models.

Author: Arman Rousta, President of 401kid

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