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Operational challenges of 529 plans in the intermediary channel

July 6, 2011

Advisor-sold 529 plans appear to be the underdog of the college savings plan world. There are only 35 advisor-sold plans throughout the United States — compared to 60 directly-sold ones. Advisor-sold plans have been losing market share, representing 51% of total 529 assets in 2010, down from 62% in 2003.529 Plans Universe

Yet advisor-sold plans could be set for a resurgence. Panelists in the NICSA webinar — “529 Plans in the Intermediary Channel,” held on Wednesday, June 29 — reviewed the latest developments that are leading to increases in both demand and supply.

Demand for advisor-sold plans remains strong. Many investors — especially those already working with a financial advisor — want to incorporate 529 plan contributions into an overall financial plans. They’d prefer to receive consolidated statements that include those plan investments, and they most certainly do not want to have to complete additional paperwork to open an account or go to a separate website to research investment options.

At the same time, recent enhancements to DTCC’s Mutual Funds Networking platform make advisor-sold 529 plans easier to manage from an operational standpoint. By increasing transparency within omnibus accounts, the changes make it feasible for the fund industry to monitor compliance with plan rules — specifically the caps on contributions and the once per year limit on changes in investment strategy — and to track cost basis (needed to prepare the 1099-Q sent to the IRS when distributions are made). Program managers or “master aggregators” will also be able to identify “crossover” accounts held at multiple broker-dealers, dubbed “control locations”.

The enhancements also address some of the concerns that the states have had about omnibus accounts. In the improved system, states will still be able to collect demographic information about plan beneficiaries and monitor the success of marketing campaigns. At the same time, a high level of oversight is maintained. Mutual fund management companies apply the same compliance standards to 529 plans as they do to standard accounts, while the broker-dealer provides additional oversight.

College piggy bankThe DTCC enhancements are also critical to making advisor-sold 529 plans economically viable, since states have been unwilling to raise program fees (compared to direct-sold plans) to cover the cost of providing investment advice. As a result, broker-dealers can afford to provide 529 services only if operations costs are minimized through streamlined processing.

And the drive to increase efficiency continues. The latest hot topic is electronic delivery of 529 plan documents. While commonplace for many mutual fund and brokerage accounts (usually with an “opt-in”), electronic document delivery is often prohibited by 529 plan program rules. Program managers will be exploring the possibility for change to those rules –both to reduce costs and to enable plan participants to receive documents in their preferred format.

The operational enhancements increase the options available to investors for saving for college expenses — allowing more families to benefit from the advantages of 529 plans.

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