#43467 - 06/08/08 12:28 PM
Dear Congress -- Please Change 529 Law
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JamesCA
Registered: 02/13/06
Posts: 17
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Dear Congress,
The 529 law has been a great success by encouraging parents to save for their child's college education. Higher education in America is vital to ensure we can continue to compete in the global economy.
There is one flaw in the 529 program. As currently structured, each State contracts with a financial provider. Account holders must invest through the providers, many of whom charge account fees in excess of 1% per year and only offer a limited menu of investment choices.
I encourage Congress to amend the 529 law to allow account holders the option of self-directing investment choices through a stock broker. This would make 529's very similar to IRA's and many 401(k) plans, which allow a brokerage option.
This change would give parents freedom to choose from the entire universe of stocks, bonds, FDIC-insured CDs, mutual funds, and exchange traded funds (ETFs). Many ETFs are available that cover the broad stock and bond indices and charge expense fees less than 0.2%, a substantial savings over the highly restrictive 529 "monopoly" plans that exist now.
Please modify 529 to allow a self-directed option. It will offer parents more freedom of choice, lower costs and bring more competition to the 529 world.
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#43468 - 06/09/08 09:14 AM
Re: Dear Congress -- Please Change 529 Law
[Re: JamesCA]
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Drew
Registered: 01/09/00
Posts: 2478
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How about I 100 % disagree---we already have 50+ choices and competition among suppliers does work and a good number of plans have reduced fees --and the monopoly element has been trimmed.
If you as Congress want to eliminate monopoly in education then you want to address the view of the US Appeals Courts which upheld the rights of the Ivies to price fix aid some years ago and to wipe out some of the Robin Hood features of aid which in effect wipe out accountability for special interest groups such as American Indian and traditionally Black colleges as to failure to repay loans.
_________________________
Drew
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#43469 - 06/09/08 11:01 AM
Re: Dear Congress -- Please Change 529 Law
[Re: Drew]
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anonymous
Registered: 03/29/05
Posts: 1992
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First of all, I don't see it happening.
I don't think that we have lots of choices. We may have 50 + choices, and competition has brought down prices, but the choice is still mutual fund vs. mutual fund vs. mutual fund. It's actually more restrictive than that because the choice is really one mutual fund family vs one mutual fund family vs one mutual fund family.
James, be careful of unintended consequences. If you get rid of the state involvement, you'll probably get rid of state tax breaks.
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#43470 - 06/09/08 01:43 PM
Re: Dear Congress -- Please Change 529 Law
[Re: anonymous]
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Joe Hurley
Registered: 01/07/00
Posts: 2080
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Allow me to conjure up a response you might receive:
Dear James,
Thank you for your suggestion. We're pleased to report that Congress has already approved a college-savings vehicle permitting self-directed investments just like an IRA does. In fact, we originally named it the "Education IRA" but you probably recognize it now as the Coverdell ESA. Of course, for budget purposes we originally had to limit annual contributions to $500, although you will be thrilled to know the limit has since increased to $2,000. And although the annual limit is scheduled to revert to $500 in 2011, we're hoping college will be less expensive by then. Of course, with the Coverdell ESA you also have a bunch of restrictions like income limits and age limits, but those are things we always do with our tax incentives. Not too many of us know a lot about those crazy state-sponsored 529 plans that allow everyone to save for the full cost of college and graduate school. But a lot of us use them because they seem a lot more flexible and we might even get a break on our state taxes. Those crazy states.
Regards,
Congress
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#43471 - 06/09/08 11:57 PM
Re: Dear Congress -- Please Change 529 Law
[Re: Joe Hurley]
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itstoomuch
Registered: 01/01/06
Posts: 757
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I had a Pro post ready to submit, but decided that it wasnt worth posting.
I have revisited and think that this idea only has limited merit, a Con position. Assuming most of the conditions on 529s stay in place, except to be able to use brokerage trading, I would find that
1. A trading account will have very limited value and could cause a loss of funds because. a)Buy or sell or reallocation can be done only once a year. In the purchase of a stock or bond, the once a year reallocation would be very dangerous. b) The pricing of S/B are too rapid for good trading practices unless you have nerves stronger and unwavering of titanium.
2. To have much of an impact, the trader should have sufficient funds to make round lot purchases. For most people, making a purchase of AAPL would be a stretch of funds.
3. UGMA are a good substitute because of the capital gain/loss features, qualified dividends of stocks and mmkt funds. There would be no such features in a 529 brokerage account... gains are not taxed but losses are pure losses. UGMA are completely mobile on trades, allocation, and institution to institution.
4. You are dealing with a broker who must be paid for time and knowledge. A MF based 529, the costs are spread out amongst all investors. If you have a self directed, low fee 529, your time, the brokers time, the media and subscription costs for market news could far out weigh that of the MF fees.
Personally, we used UGMA for college funding, and have been fairly successful in funding the college and maintaining an acceptable cashflow.I find 529s too restrictive and too inflexible for anything other than extreme longterm goals. I doubt many investors could stomach a 40% loss in a trading account dedicated to just one purpose without favored tax treatments.
Edited by itstoomuch (06/10/08 12:20 AM)
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#43472 - 06/10/08 05:35 AM
Re: Dear Congress -- Please Change 529 Law
[Re: itstoomuch]
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anonymous
Registered: 03/29/05
Posts: 1992
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itstoomuch, you bring up a good point. Self-directed 529 plans without the ability to make investment changes more than 1x a year could be very dangerous.
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#43473 - 06/10/08 10:43 AM
Re: Dear Congress -- Please Change 529 Law
[Re: anonymous]
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TexasCFP
Registered: 08/23/01
Posts: 756
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I think families overlook UTMAs far too often. A typical student can attain the same tax efficiency of a 529 up to about $15,000 deposited in a UTMA. They then have all the freedom of investment sought by the original poster and the ability to pay for many additional expenses with tax advantaged dollars (transportation, personal expenses, technology, etc...).
_________________________
David Hollands, CFP
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#43474 - 06/10/08 11:34 AM
Re: Dear Congress -- Please Change 529 Law
[Re: TexasCFP]
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Drew
Registered: 01/09/00
Posts: 2478
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Yep, given that we have at least two great tools--529s and UTMA's then if it isn't broke we don't need anyone to fix it!
_________________________
Drew
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#43475 - 06/10/08 08:46 PM
Re: Dear Congress -- Please Change 529 Law
[Re: Drew]
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itstoomuch
Registered: 01/01/06
Posts: 757
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I also feel that 529's is a scheme for the wealthy with the guise to benefit the middle class. The average person need to be fully aware of the lack of 529 tax benefits vis-a-vis UGMAs. Choices of investments, states, fees, advisors are just minor points that obscure the goal of funding college.
Come Sept or Aug, when the markets maybe further down because of the multiple problems that we all know about, there will be many unhappy parents who will think that a EE or CD could have gotten them further along.
Edited by itstoomuch (06/10/08 08:49 PM)
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#43477 - 06/11/08 12:15 AM
Re: Dear Congress -- Please Change 529 Law
[Re: Joe Hurley]
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JamesCA
Registered: 02/13/06
Posts: 17
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Joe Hurley:
Not too many of us know a lot about those crazy state-sponsored 529 plans that allow everyone to save for the full cost of college and graduate school. But a lot of us use them because they seem a lot more flexible and we might even get a break on our state taxes. Those crazy states.
Perhaps my original post was misunderstood? My only suggestion was to allow self-directed trading in a brokerage account; I wasn't suggesting a change of 529 administration from the states to the federal government. The states could contract with major brokerages such as Schwab, Ameritrade, e-Trade, etc. to provide a 529 account service.
Adding a self-directed trading option to existing state-run 529's could be done simply and without disturbing the existing mutual fund system in place now. It would add more freedom and flexibility to the 529 system.
Self-directed trading has a proven, lengthy track record with IRA's and 401(k)'s. I can't think of any negatives to doing the same with state-run 529's.
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Moderator: Joe Hurley
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