Because We Know Better. And Because No One Pays US to Like Them.
Why Does Wall Street - and Your State - LOVE 529 Plans?
Brief 529 History If Honda Accords held their value like the chart at left, would Honda be selling many Accords? The chart at left depicts the nearly 50% crash in the S&P 500 Index over just two years, from August 2000 through September 2002. When markets fall, brokers don't have a reason to call clients nor something particularly interesting to sell them. Sales contests tend to stop working and the multi-million dollar paychecks of the chieftains of Wall Street begin to look pricey to shareholders.
After the dot-com crash, Wall Street needed something to sell someone. "Proof" of the genesis of 529 Plan marketing can be seen in this perspective because Section 529 of the Internal Revenue Code has been around since 1996 (the Small Business Jobs Protection Act, HR 3448). In 1996, 1997, 1998 and 1999 however, Wall Street needed no new product; everything Wall Street could produce was eagerly bought by investors wanting to cash in on the 20% and 30% annual gains.
But then the market declined for three consecutive years, wiping out
trillions in personal American wealth, and a new approach needed to be taken. Some bright minds found Section 529 and voila! - a new marketing direction (after the states were bought off for a percentage of the fees) was borne. Some call us cynics; we think we are well-informed realists...
Paid to Love Them We've already highlighted why the salespeople, the money managers and the states love 529 Plans. How is it that parents have been taught to love them as well?
Parents have been sold on the 529 Plan concept: That the only way to eventually put their children through college is to invest in stock and bond mutual funds in a "special" account where earnings come out tax-free. Monthly or annual investments are instead given the warm-and-fuzzy "contributions" moniker. And the idea that parents are doing something to benefit their children, and not themselves, enables 529 Plans to tug on the heart-strings.
The cold, hard reality however, is a bit different.
1. 529 Plans are principal-at-risk mutual funds and inflexible ones at that (most allow only one investment change per year).
2. 529 Plan earnings are NOT always tax-free; earnings taxation is determined by an IRS formula involving financial aid.
3. 529 Plan balances count AGAINST need-based aid eligible families and may reduce financial aid awards - sometimes significantly.
4. 529 Plan performance has been mostly poor with even the most popular of fund selections in Plans posting negative 5-year returns.
Is this any way to save for college?
Sales Contest "2nd Place: Set
of Steak Knives. 3rd Place:
"Glengarry Glen Ross"
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