More States Consolidate On 529 Plans | No plans to curtail Connecticut's college savings plan, which boasts additional tax breaks and lower fees
As families strive to save money for college, several small states are dumping their 529 college-savings plans and urging the investors to roll their money over to other states’ lower-cost plans.
But while some states are moving away from 529 plans, Connecticut officials say it’s thriving here. Deputy Treasurer Howard Rifkin said the state has a “pretty robust” plan with more than $1 billion in assets.
Investors can use any state’s 529 plan — and later pull out all the funds, federal tax-free, for college costs. But many invest in their own state’s plan for state tax breaks and convenience.
Tennessee is closing its 529 savings plan this year because of lackluster demand. Investors can roll their money over to any state’s plan, but Tennessee is recommending that they consider Georgia’s much larger 529 plan. Both plans are managed by TIAA-CREF, as is the Connecticut 529 plan.
Lower Fees
The move follows the closing two years ago of Wyoming’s plan; Wyoming now encourages its residents to consider a 529 plan sponsored by Colorado.
Mississippi may be next. It says it’s “considering options” such as partnering with Georgia to offer a 529 plan. Georgia says it’s also talking to a few other small states about rolling over assets to its plan.
States say that by shutting unpopular 529s, they can partner with bigger states to give families more cost-effective savings options.
“We don’t have the economies of scale to have a program with low fees and a wide range of investment choices,” says Steve Curry, assistant to the Tennessee state treasurer.
That is nearly the opposite scenario in Connecticut, according to Rifkin, who said that the state is in the lower quartile of all states in terms of fees for the Connecticut Higher Education Trust (CHET). There is also a tax deduction, passed by the legislature in 2006, that has made the plans more attractive for families.
Connecticut’s Tax Deal
“We have a tax deduction that isn’t the only factor, but we’ve seen a ramping up in the opening of CHET accounts,” Rifkin said. “We try to offer an array of investment options and our performance numbers have been pretty good.” Savingforcollege.com rated Connecticut as one of the best 529 plans in the country, giving it a score of 4.5 out of 5.
The drawback for states closing 529 plans, college financing experts say, is that investors might be tempted to pull their savings out, rather than roll it over to another plan.
When Wyoming’s plan closed in 2006, only 17 percent of 529 accounts rolled over to the Colorado option, according to state data. It’s unclear whether most investors moved their money to other states’ plans or withdrew it altogether. Those who use 529 money for purposes other than higher education face income tax and a 10 percent penalty on the earnings.
More Consolidation Expected
There’s also the danger that some investors will take states’ advice blindly—shifting into the 529 plan that’s pitched to them once their own state plan closes—without researching other, possibly more attractive, options, says Kalman Chany, a financial-aid consultant.
Still, consolidation of 529 plans “will happen on a larger scale eventually,” predicts Joseph Hurley of Savingforcollege.com.
Georgia’s 529 plan, with nearly $600 million in assets, is more than 12 times the size of Tennessee’s plan, and its investment options are 30 percent to 40 percent cheaper, says Doug Chittenden, president of tuition financing at TIAA-CREF.
Still, states that offer their own tax breaks for in-state 529 investors will think twice before closing the plans, says Andrea Feirstein, a 529 plan consultant, given the popularity of such perks.
Hartford Business Journal Staff Writer Sean O’Leary contributed to this story.
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