529 plans not only help people save for their children’s college educations, but they also keep people from raiding their retirement savings or other savings accounts to pay those expenses.
These types of plans are offered nationally and in all 50 states. Just like a retirement plan, a 529 allows individuals to set aside money, pre-tax, to be used for educational purposes. Many corporations now offer 529 plans as part of their overall benefits packages.
Legg Mason Global Asset Allocation (LMGAA) is a money management subsidiary of Legg Mason, which had $632 billion in assets under management as of June 30, 2011. LMGAA manages and advises $8.5 billion in assets as of March 31, 2012, and, as part of that, offers Scholars Choice, an advisor-sold 529 plan, which is managed by College Invest in Colorado.
“We are one of the largest advisor-sold plans,” said John Kenney, managing director and head of LMGAA. The program offers multiple asset classes and age-based portfolios that operate just like target-date funds in the retirement world. If someone buys into a 529 plan when their child is 3 years old, they have 15 years to save for college. Age-based portfolios change their target risk as the child ages so that investments in the plan become less risky by the time the student heads off to college.
The average cost of a public education today is $25,000 a year, Kenney said. “That is big. Certainly people need to find ways to save for it. The nice thing about 529 plans is the way most participants systematically invest and systematically save,” Kenney said.
Most 529 plan participants have money taken out of their paychecks on a monthly basis. Right now, money set aside in a bank or credit union just sits there. Interest rates have stayed below 2 percent. Like a retirement savings account, 529 plans follow the stock market and traditionally have higher returns than a savings account. Add in the fact that you can set aside money tax free, and it is a win/win.
The earlier someone starts to save for educational expenses, the less painful it will be in the long run, Kenney said.
There’s about $160 billion in assets in 529 plans right now in the U.S., “and that’s great,” said Kenney, “but when you look at it in terms of $1 trillion in student loan debt, we’re barely making a dent here. There is an opportunity here, particularly for financial advisors to educate their clients. “
He added that “everyone wants to talk about 401(k) plans, but they are missing the boat if they don’t have [529s] in there.”
Legg Mason doesn’t sell its 529 plans directly to corporations, but more than 100 corporations do offer Scholars Choice through their benefits packages, in conjunction with the financial advisor they work with.
Scholars Choice can be provided at little to no cost to the corporation, Kenney said.
Having a 529 plan as part of a benefits package makes it much easier to save, he said. “It is more likely to get put away if it goes before it gets home. The scale of college savings is daunting,” he said.
Even if students attend a four-year college in state, they can still expect to pay $100,000 for their education. The key is to start saving early. If you begin by saving $500 a month at your child’s first birthday, at 1 percent interest, you would have that $100,000 saved up by the time they turned 18, he said.
He compared saving in a 529 plan to the old joke, “How do you eat an elephant? One small bite at a time.”
The beauty of the 529 plan is that students can participate in any state’s plan. It doesn’t have to be their home state’s plan, Kenney said. Many states offer tax advantages on top of the tax benefits inherent in 529 plans, so it pays to shop around, he said.
What happens if the child you are saving money for doesn’t attend college? Do you lose that money? The money in a 529 plan can be used for any type of educational expense, including 2-year colleges, 4-year colleges and universities. Those funds also can be transferred to another person, like a grandchild, if the initial beneficiary chooses not to attend school.
For more information on 529 and other savings plans, read the following: