SECTION 529 COLLEGE SAVINGS PLANS



Section 529 of the Internal Revenue Code authorizes individual states to establish programs to help people save for future college expenses. Each State program permits tax-favored contributions to be made on behalf of a student beneficiary for higher education expenses, including tuition, room, board and related costs. Contributions are typically invested in a variety of equity and bond mutual funds, depending on the amount of time until the student is expected to attend college.

 

Withdrawals from Section 529 accounts for qualified higher education expenses are free from federal income tax. States typically provide tax-free treatment for withdrawals as well, and some even offer a limited tax deduction for contributions made to a Section 529 account.

 

All states offer Section 529 plans in which investments can be made directly with a mutual fund and without a sales load or other commission expenses. At least 35 states also offer Section 529 plans through broker-dealers and financial advisors, in which sales loads and other fees are charged to the account.

 

In the wake of the recent financial crisis, several large broker-dealers are trying to convert individual Section 529 accounts onto their own recordkeeping systems--through a process called omnibus accounting--for the purpose of extracting additional fees from mutual funds and investors. This is being done currently in the Virginia College Savings Plan and is expected to spread to other state Section 529 plans.

 

This conversion to a new recordkeeping system is being done without any competitive bidding process within individual states, as these broker-dealers possess leverage to charge fees that are higher than those set through normal market forces. This broker-dealer initiative is also less efficient than the current system and will cause operational costs to rise for investors in these broker-sold plans.

 

CMFI is in the process of educating State 529 Plans about the problems being created by the use of omnibus accounting in these programs. CMFI is encouraging State 529 programs to: (1) use competitive bidding to select recordkeeping vendors; (2) ensure that any savings through improvements in operational efficiencies are passed along to Section 529 investors and beneficiaries; and (3) require full transparency of investor-level information for State program managers, on a real-time basis.

 

Click on the tabs for Documents, Comments, and Blog Entries to review the latest developments on this issue.  

  • CMFI Files Comment Letter on Section 529 College Savings Plans
    On March 20, 2014, the Coalition of Mutual Fund Investors (CMFI) filed a comment letter with the Securities and Exchange Commission, in response to a new rule change affecting Section 529 college savings plans proposed by the Municipal Securities Rulemaking Board.
  • CMFI Comment Letter to Municipal Securities Rulemaking Board
    On December 21, 2012, CMFI sent a comment letter to the Municipal Securities Rulemaking Board (MSRB), which regulates broker-dealers transacting in Section 529 college savings plans. In its letter, CMFI urges the MSRB to evaluate the growing use of omnibus accounts by large broker-dealers in Section 529 plans, as it develops rules for these broker-dealers.
  • Response Letter from the Alaska 529 Plan
    On May 4, 2012, CMFI received a letter from the Alaska 529 program, in response to a CMFI letter transmitting the results of its recent study on 529 plans. This study compared the costs of investing in advisor-sold 529 plans with the costs of investing in direct-sold 529 plans.
  • Response Letter from the Virginia 529 College Savings Plan
    On April 3, 2012, the CEO of the Virginia 529 College Savings Plan sent a letter to CMFI about its recent study comparing the costs of advisor-sold 529 plans with direct-sold 529 plans. The Virginia 529 Plan disagrees with CMFI's concerns that the Virginia advisor-sold plan is costing investors more than twice the expense of investing in the state's direct-sold plan.
  • Letter from the Utah Educational Savings Plan
    On February 2, 2012, the Executive Director of the Utah Educational Savings Plan sent a letter about CMFI's recent study on the costs of advisor-sold Section 529 plans. The Utah letter states that "[t]the thorough analysis your report provides is an excellent resource for college savers searching for the best savings vehicle to meet their needs." Utah only offers a direct-sold plan, with some of the lowest costs among Section 529 plans. The Utah Savings Plan provides a variety of investment options, with annual asset-based fees ranging from 0.00% to 0.59%, depending on the underlying funds selected by an account owner. Out-of-state investors pay a maximum annual maintenance fee of $15, which is waived if Savings Plan communications are received electronically, instead of in the mail. Over a period of 10 years, a $10,000 investment results in costs ranging from $0 to $757, depending on the investment options selected and the residency of the investor.
  • CMFI Study on Investor Costs in Section 529 College Savings Plans
    On January 30, 2012, the Coalition of Mutual Fund Investors (CMFI) released a study on the costs and expenses of investing in Section 529 college savings plans. Using public information, this CMFI study compared the fees and costs of making mutual fund investments in a state 529 plan directly, with the fees and costs of making the same investments in a state 529 plan through a financial intermediary, such as a broker-dealer or a financial advisor. CMFI’s study concluded that the fees and costs of investing in the state 529 plans through a financial intermediary are, on average, more than twice as expensive as the fees and costs of investing in state 529 plans directly. While there are a few 529 plans that may be cost-effective by themselves, an investor is far better off investing in almost any of the 529 plans that are sold directly, at least when comparing the fees and costs of a 529 plan investment.
  • Response Letter from the Virginia 529 Plan
    On September 27, 2011, the Virginia 529 Plan responded to CMFI regarding its concerns about the recent conversion to broker-dealer omnibus accounts within the advisor-sold plan in the Commonwealth. The letter to CMFI stated that the Virginia 529 Plan conducted due diligence to ensure that the omnibus platform would provide "necessary transparency and compliance with [Internal Revenue Code] 529 and not negatively impact costs."
  • Response Letter from the New York State Comptroller's Office
    On September 6, 2011, the New York State Comptroller's Office responded to CMFI's recent letter regarding the use of omnibus accounting in Section 529 college savings plans. The letter to CMFI stated that the Comptroller's Office is aware of the omnibus accounts issue and is "watching the marketplace closely for further developments."
  • Response Letter from New York State Comptroller's Office
    On September 6, 2011, the New York State Comptroller's Office responded to CMFI's recent letter regarding the use of omnibus accounting in Section 529 college savings plans. The New York letter to CMFI stated that the Comptroller's Office is aware of the omnibus accounting issue and is "watching the marketplace closely for further developments."
  • CMFI Comment Letter to Municipal Securities Rulemaking Board
    On September 1, 2011, CMFI submitted a comment letter to the Municipal Securities Rulemaking Board about Section 529 College Savings Plans. The purpose of this CMFI comment letter is to inform the MSRB about a new recordkeeping practice that is being promoted by large broker-dealers to increase the fees that they can charge for services rendered to Section 529 Plans. This recordkeeping practice--called omnibus accounting--has recently been implemented for the Virginia College Savings Plan. And discussions are underway to expand the use of this recordkeeping practice to other State 529 Plans. In its comment letter, CMFI recommends that the MSRB expand its requirements for broker-dealer fee disclosures and consider competitive bidding of broker-dealer recordkeeping contracts.
  • CMFI Letter to New York State Comptroller Thomas DiNapoli
    On August 4, 2011, CMFI sent a letter to New York State Comptroller Thomas DiNapoli, regarding the potential use of omnibus accounting in the State's advisor-sold Section 529 Plan. CMFI urged the State to require competitive bidding for all recordkeeping vendors, ensure that any operational efficiencies are passed along to Plan investors and beneficiaries, and require full transparency of investor-level information for tax compliance purposes.
  • Response to CMFI Letter from California State Treasurer Bill Lockyer
    On July 22, 2010, California State Treasurer Bill Lockyer responded to CMFI's letter regarding the potential use of omnibus accounting in the State's advisor-sold Section 529 plan. Mr. Lockyer stated that his office seeks to keep the 529 recordkeeping process transparent and to maintain competitive, reasonable fees for the program. He stated that his office will look closely at this issue, as the State selects a program manager for its advisor-sold 529 plan.
  • CMFI Letter to IRS Commissioner Douglas Shulman
    On June 17, 2011, CMFI sent a letter to Internal Revenue Service Commissioner Douglas Shulman about the use of omnibus accounting in certain State Section 529 plans. CMFI believes that this broker-dealer recordkeeping practice is inconsistent with current IRS guidance and proposed regulations. CMFI urged the IRS to refine further its Section 529 regulatory rules, in order to avoid a threat to the proper administration of the federal tax laws.
  • CMFI Letter to California State Treasurer Bill Lockyer
    On June 14, 2011, CMFI sent a letter to California State Treasurer Bill Lockyer, expressing concern about the use of omnibus accounting in the State's advisor-sold Section 529 Plan. CMFI advocated that the State consider the use of competitive bidding for broker-dealer recordkeeping contracts and ensure that any improvements in internal operational efficiencies are passed through to Plan beneficiaries.
  • CMFI Letter to Virginia Attorney General Kenneth Cuccinelli
    On June 14, 2011, CMFI sent a letter to Virginia Attorney General Kenneth Cuccinelli, expressing concern about the recent conversion of Virginia's advisor- sold 529 plan to omnibus accounting by broker-dealers. CMFI expressed its belief that this new broker-dealer recordkeeping practice is inconsistent with the requirements of the Virginia Consumer Protection Act, the Virginia Administrative Code, and the guidance issued by the Internal Revenue Service for State 529 plans.
  • CMFI Letter to Virginia Treasurer Manju Ganeriwala
    On December 17, 2010, CMFI sent a letter to the Treasurer of the Commonwealth of Virginia, Manju Ganeriwala, regarding the conversion of directly-held investor accounts onto the omnibus account platform of a large broker-dealer. CMFI believes that this conversion is being done for the primary purpose of extracting additional fees from mutual funds and their investors, in order to benefit large broker-dealers.

Section 529 of the Internal Revenue Code authorizes individual states to establish programs to help people save for future college expenses. Each State program permits tax-favored contributions to be made on behalf of a student beneficiary for higher education expenses, including tuition, room, board and related costs. Contributions are typically invested in a variety of equity and bond mutual funds, depending on the amount of time until the student is expected to attend college.

 

Withdrawals from Section 529 accounts for qualified higher education expenses are free from federal income tax. States typically provide tax-free treatment for withdrawals as well, and some even offer a limited tax deduction for contributions made to a Section 529 account.

 

All states offer Section 529 plans in which investments can be made directly with a mutual fund and without a sales load or other commission expenses. At least 35 states also offer Section 529 plans through broker-dealers and financial advisors, in which sales loads and other fees are charged to the account.

 

In the wake of the recent financial crisis, several large broker-dealers are trying to convert individual Section 529 accounts onto their own recordkeeping systems--through a process called omnibus accounting--for the purpose of extracting additional fees from mutual funds and investors. This is being done currently in the Virginia College Savings Plan and is expected to spread to other state Section 529 plans.

 

This conversion to a new recordkeeping system is being done without any competitive bidding process within individual states, as these broker-dealers possess leverage to charge fees that are higher than those set through normal market forces. This broker-dealer initiative is also less efficient than the current system and will cause operational costs to rise for investors in these broker-sold plans.

 

CMFI is in the process of educating State 529 Plans about the problems being created by the use of omnibus accounting in these programs. CMFI is encouraging State 529 programs to: (1) use competitive bidding to select recordkeeping vendors; (2) ensure that any savings through improvements in operational efficiencies are passed along to Section 529 investors and beneficiaries; and (3) require full transparency of investor-level information for State program managers, on a real-time basis.

 

Click on the tabs for Documents, Comments, and Blog Entries to review the latest developments on this issue.  

Document Title: 
CMFI Files Comment Letter on Section 529 College Savings Plans
Document Desc: 
On March 20, 2014, the Coalition of Mutual Fund Investors (CMFI) filed a comment letter with the Securities and Exchange Commission, in response to a new rule change affecting Section 529 college savings plans proposed by the Municipal Securities Rulemaking Board.
Document Title: 
CMFI Comment Letter to Municipal Securities Rulemaking Board
Document Desc: 
On December 21, 2012, CMFI sent a comment letter to the Municipal Securities Rulemaking Board (MSRB), which regulates broker-dealers transacting in Section 529 college savings plans. In its letter, CMFI urges the MSRB to evaluate the growing use of omnibus accounts by large broker-dealers in Section 529 plans, as it develops rules for these broker-dealers.
Document Title: 
Response Letter from the Alaska 529 Plan
Document Desc: 
On May 4, 2012, CMFI received a letter from the Alaska 529 program, in response to a CMFI letter transmitting the results of its recent study on 529 plans. This study compared the costs of investing in advisor-sold 529 plans with the costs of investing in direct-sold 529 plans.
Document Title: 
Response Letter from the Virginia 529 College Savings Plan
Document Desc: 
On April 3, 2012, the CEO of the Virginia 529 College Savings Plan sent a letter to CMFI about its recent study comparing the costs of advisor-sold 529 plans with direct-sold 529 plans. The Virginia 529 Plan disagrees with CMFI's concerns that the Virginia advisor-sold plan is costing investors more than twice the expense of investing in the state's direct-sold plan.
Document Title: 
Letter from the Utah Educational Savings Plan
Document Desc: 
On February 2, 2012, the Executive Director of the Utah Educational Savings Plan sent a letter about CMFI's recent study on the costs of advisor-sold Section 529 plans. The Utah letter states that "[t]the thorough analysis your report provides is an excellent resource for college savers searching for the best savings vehicle to meet their needs." Utah only offers a direct-sold plan, with some of the lowest costs among Section 529 plans. The Utah Savings Plan provides a variety of investment options, with annual asset-based fees ranging from 0.00% to 0.59%, depending on the underlying funds selected by an account owner. Out-of-state investors pay a maximum annual maintenance fee of $15, which is waived if Savings Plan communications are received electronically, instead of in the mail. Over a period of 10 years, a $10,000 investment results in costs ranging from $0 to $757, depending on the investment options selected and the residency of the investor.
Document Title: 
CMFI Study on Investor Costs in Section 529 College Savings Plans
Document Desc: 
On January 30, 2012, the Coalition of Mutual Fund Investors (CMFI) released a study on the costs and expenses of investing in Section 529 college savings plans. Using public information, this CMFI study compared the fees and costs of making mutual fund investments in a state 529 plan directly, with the fees and costs of making the same investments in a state 529 plan through a financial intermediary, such as a broker-dealer or a financial advisor. CMFI’s study concluded that the fees and costs of investing in the state 529 plans through a financial intermediary are, on average, more than twice as expensive as the fees and costs of investing in state 529 plans directly. While there are a few 529 plans that may be cost-effective by themselves, an investor is far better off investing in almost any of the 529 plans that are sold directly, at least when comparing the fees and costs of a 529 plan investment.
Document Title: 
Response Letter from the Virginia 529 Plan
Document Desc: 
On September 27, 2011, the Virginia 529 Plan responded to CMFI regarding its concerns about the recent conversion to broker-dealer omnibus accounts within the advisor-sold plan in the Commonwealth. The letter to CMFI stated that the Virginia 529 Plan conducted due diligence to ensure that the omnibus platform would provide "necessary transparency and compliance with [Internal Revenue Code] 529 and not negatively impact costs."
Document Title: 
Response Letter from the New York State Comptroller's Office
Document Desc: 
On September 6, 2011, the New York State Comptroller's Office responded to CMFI's recent letter regarding the use of omnibus accounting in Section 529 college savings plans. The letter to CMFI stated that the Comptroller's Office is aware of the omnibus accounts issue and is "watching the marketplace closely for further developments."
Document Title: 
Response Letter from New York State Comptroller's Office
Document Desc: 
On September 6, 2011, the New York State Comptroller's Office responded to CMFI's recent letter regarding the use of omnibus accounting in Section 529 college savings plans. The New York letter to CMFI stated that the Comptroller's Office is aware of the omnibus accounting issue and is "watching the marketplace closely for further developments."
Document Title: 
CMFI Comment Letter to Municipal Securities Rulemaking Board
Document Desc: 
On September 1, 2011, CMFI submitted a comment letter to the Municipal Securities Rulemaking Board about Section 529 College Savings Plans. The purpose of this CMFI comment letter is to inform the MSRB about a new recordkeeping practice that is being promoted by large broker-dealers to increase the fees that they can charge for services rendered to Section 529 Plans. This recordkeeping practice--called omnibus accounting--has recently been implemented for the Virginia College Savings Plan. And discussions are underway to expand the use of this recordkeeping practice to other State 529 Plans. In its comment letter, CMFI recommends that the MSRB expand its requirements for broker-dealer fee disclosures and consider competitive bidding of broker-dealer recordkeeping contracts.
Document Title: 
CMFI Letter to New York State Comptroller Thomas DiNapoli
Document Desc: 
On August 4, 2011, CMFI sent a letter to New York State Comptroller Thomas DiNapoli, regarding the potential use of omnibus accounting in the State's advisor-sold Section 529 Plan. CMFI urged the State to require competitive bidding for all recordkeeping vendors, ensure that any operational efficiencies are passed along to Plan investors and beneficiaries, and require full transparency of investor-level information for tax compliance purposes.
Document Title: 
Response to CMFI Letter from California State Treasurer Bill Lockyer
Document Desc: 
On July 22, 2010, California State Treasurer Bill Lockyer responded to CMFI's letter regarding the potential use of omnibus accounting in the State's advisor-sold Section 529 plan. Mr. Lockyer stated that his office seeks to keep the 529 recordkeeping process transparent and to maintain competitive, reasonable fees for the program. He stated that his office will look closely at this issue, as the State selects a program manager for its advisor-sold 529 plan.
Document Title: 
CMFI Letter to IRS Commissioner Douglas Shulman
Document Desc: 
On June 17, 2011, CMFI sent a letter to Internal Revenue Service Commissioner Douglas Shulman about the use of omnibus accounting in certain State Section 529 plans. CMFI believes that this broker-dealer recordkeeping practice is inconsistent with current IRS guidance and proposed regulations. CMFI urged the IRS to refine further its Section 529 regulatory rules, in order to avoid a threat to the proper administration of the federal tax laws.
Document Title: 
CMFI Letter to California State Treasurer Bill Lockyer
Document Desc: 
On June 14, 2011, CMFI sent a letter to California State Treasurer Bill Lockyer, expressing concern about the use of omnibus accounting in the State's advisor-sold Section 529 Plan. CMFI advocated that the State consider the use of competitive bidding for broker-dealer recordkeeping contracts and ensure that any improvements in internal operational efficiencies are passed through to Plan beneficiaries.
Document Title: 
CMFI Letter to Virginia Attorney General Kenneth Cuccinelli
Document Desc: 
On June 14, 2011, CMFI sent a letter to Virginia Attorney General Kenneth Cuccinelli, expressing concern about the recent conversion of Virginia's advisor- sold 529 plan to omnibus accounting by broker-dealers. CMFI expressed its belief that this new broker-dealer recordkeeping practice is inconsistent with the requirements of the Virginia Consumer Protection Act, the Virginia Administrative Code, and the guidance issued by the Internal Revenue Service for State 529 plans.
Document Title: 
CMFI Letter to Virginia Treasurer Manju Ganeriwala
Document Desc: 
On December 17, 2010, CMFI sent a letter to the Treasurer of the Commonwealth of Virginia, Manju Ganeriwala, regarding the conversion of directly-held investor accounts onto the omnibus account platform of a large broker-dealer. CMFI believes that this conversion is being done for the primary purpose of extracting additional fees from mutual funds and their investors, in order to benefit large broker-dealers.