Retirement savers with kids should pay attention to a new crackdown on brokers who sell college savings plans.
Regulators are inviting investment advisers and firms to self-report their sales practices after regulatory reviews found a substantial number of cases in which investors weren't told about varying fees associated with the plans. Firms have until the end of April to declare participation, and detailed reports on their sales practices are due in May to the Financial Industry Regulatory Authority, or FINRA. Firms who enroll in the voluntary program are promised a more lenient restitution than if they are later found in violation.
This is particularly timely because the Tax Cuts and Jobs Act of 2017 opened up 529 education savings plans to allow distributions for kindergarten through 12th grade tuition.
With the change, it becomes even more important for savers to understand fees associated with these programs. Class A shares, for example, typically involve an up-front sales charge, or load, while class C shares often involve ongoing annual loads. So, for example, someone planning to save for many years for a young child's eventual college expenses might be better off with class A shares.
"They are amazing plans and have been expanded, but there have been abuses," said Andrew Stoltmann, a Chicago attorney who represents investors in securities cases. "Firms have often recommended the pricier option that isn't in the best interest of the plan holder."
Even if the share-class loads are properly disclosed, the person recommending the plans may not be required to tell investors that a no-load plan may be available in their home state that offers tax breaks the broker-sold plan doesn't have, Stoltmann said.
And that's where your retirement comes in. Every penny in fees on a college savings plans is a penny less that goes into the 401(k), IRA or other retirement savings vehicle.
Always ask your adviser if he or she is being paid a commission to recommend a particular plan, said Mark Kantrowitz, publisher of savingforcollege.com. And with the new ability to use 529 funds for K-12 tuition, more people will likely be parking funds for a much shorter time, making hefty front-end loads all the more egregious, he said.
"Investors may do everything with their advisers, but in some cases, they may be better off (in direct-sold state plans) because lower fees are the key to maximizing returns," Kantrowitz said.
If you do choose to work with an adviser, make sure you're getting your money's worth by getting a considered opinion on the best withdrawal strategy when you start taking out the money, said Susan Licht, a financial services group partner with law firm KattenMuchinRosenman LLP.
Just as you expect your adviser to recommend the most tax-efficient way to tap retirement accounts, you should get a thoughtful plan on how risky an education-savings portfolio should be given the time horizon and how best to make changes as the goal gets close.
"529 plan brokers should have discussions with investors about what plan to use, who is the beneficiary and how it will be used," said Licht, a former FINRA official. "It's only with a fulsome discussion of all these factors that an investor can make a sound decision."
And by the way, you may be paying for advice on these plans in other ways. Some advisers include these plans in the overall assets under management fees they charge, which is separate from the share-class issue FINRA is dealing with in the initiative.
If you have 529 plans worth $100,000 and work with a financial adviser who charges 1 percent per year, that's $1,000 annually you're paying to have that person watch over the funds. That could be a bargain if you feel you need custom advice that fits with your other investments, or it could be a waste of money if a low-cost, age-based option is available in your state plan. The key is to consider what advice you want and how long you'll pay for it, and choose accordingly.
And that's pretty much like retirement advice, too.
