401kid’s 529 Plan Report

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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