Bank Investment Consultant

Ask bank-based financial consultants about the role 529 education savings plans play in their clients' overall investment portfolios and the response is, to put it kindly, underwhelming.

"Right now, 529s make up no more than 5% of our annual production," said David Wick, the head of HTLF Investment, a unit of Heartland Financial Corp., a multibank holding company in Dubuque, Iowa.

Chad Klitzke, a financial consultant covering 15 banks for Associated Banc-Corp of Green Bay, Wis., offered a similar estimate.

Even Ken Kehrer of Kehrer-Limra, the go-to guy for information on investment sales in banks, doesn't bother to collect data on the sale of 529s by bank-based advisers. "Nobody ever asks me about them," he said.

The product's history has something to do with the ambivalence in the bank channel about 529 plans. The plans were created by Congress in 1996 and rolled out state by state over several years, with each state making its own decisions about the tax treatment of contributions and the way the funds would be managed.

Known at the Internal Revenue Service as Qualified Tuition Plans, 529s are essentially tax-advantaged college savings vehicles. Contributions are made in the name of a beneficiary but remain under the control of the individual making the contributions, who also has the freedom to change the beneficiary at any time.

Contributions are made after federal taxes, but individuals investing in their own state's program can make contributions before state taxes, up to a limit set by the state. There is no restriction on investing in an out-of-state 529 plan, but state tax exemptions are granted only to investments made in state.

Before all 50 states finally adopted 529 programs, investors in states that had no plans were often directed by financial advisers to out-of-state plans, creating a situation where some investors got tax breaks on money paid into 529s, while others didn't. And in states that did offer 529s, there was little reason for bank-based investment advisers to be excited about them, because they couldn't sell them. Most were sold directly by the state.

"In the past there was less incentive for a registered rep to sell a 529 plan that was controlled by the state, because in many cases the rep could not make any commission," Mr. Wick said. Most states have programs that can be sold through registered representatives, but they still offer plans that can be purchased directly from the state, so consumers can avoid fees and commissions — something representatives are typically required to point out to prospective investors.

Another disincentive is the large amount of work that the plans require. Though commissions are comparable to those offered by most mutual fund companies, the sale tends to involve much more research and a larger administrative burden.

"No question about it, there is a lot of paperwork involved in it," Mr. Klitzke said. "The checks and balances in place for our company and the paperwork we go through for the states" are more burdensome than those associated with typical mutual funds.

Tobias Henriksson, the product manager in charge of education savings at Raymond James, said "there is a hassle factor as far as paperwork and determining what plan to use. Brokers are reluctant to offer it, because you have other variables to take into consideration, such as the state the client lives in and some of the expense layer. It tends to be more confusing."

But like it or not, bank reps should come to terms with the 529 plan. Last September's passage of the Pension Protection Act guaranteed that distributions from 529 plans will remain tax-free if they are used to pay education-related expenses — a feature that had been scheduled to sunset in 2010. This removes much of the uncertainty surrounding the long-term benefits of 529s.

After the Pension Protection Act was passed, Fidelity Investments commissioned a survey of more than 1,000 parents with children under age 10 and found that less than one in four who had started saving for college were doing so through a 529 plan. However, more than half of those said that they were more likely to open one as a result of the new law. More than one in three parents who already had 529s said that the new law had made them more likely to increase the amount they donate to the plans.

In fact, a study released in May by the Investment Company Institute found that in the fourth quarter of 2006, the first full three-month period with the new law in place, the amount of money in 529 plans nationwide jumped 8.5%, more than twice the average quarterly growth rate over the past three years, to $105.7 billion.

"When tax-free withdrawal for education became permanent, it removed a lot of ambiguity," Mr. Henriksson said. "529s are really unique, and you have to be stupid not to be using them if you're investing for an education."

Like others, he compared the uptake of 529 plans to the slow but steady growth of investments in individual retirement accounts, which were created in 1975 but held less than 20% of all retirement assets until as late as 1999.

"When the IRA came out, there were skeptics who wondered how long this new thing was going to be around," he said. "You have the same thing with 529 plans, but I think we are past that a little. Eventually they will be just like an IRA — everyone will have one."

Most reps agree that the 529 plan is more of a relationship-building tool than a revenue producer. "Your account size goes down drastically with 529 plans, because it's usually younger families starting them," said Kevin Babcock, a senior investment adviser representative with Centier Bank in Valparaiso, Ind.

Most of his clients have portfolios of about $40,000 to $50,000, but 529s tend to start out with about $5,000. "A 529 plan is more of a building-block product for me," he said. "Any time you talk to someone about a 529 plan, it can be a foot in the door to other business, not just with them, but also with others — grandparents, relatives, friends."


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