529 College Savings Plans
What You Should Know
529 Plans at a Glance
What is a 529 Plan?
How do 529 Plans work?
Who sells 529 Plans?
How are 529 Plans regulated?
Issues
Resources for Regulators
529 Plans: What You Should Know
What is a 529 Plan?

Established under Internal Revenue Code 529, a 529
College Savings Plan is a qualified tuition program
through which individuals make investments to
accumulate savings for qualified higher education
costs for beneficiaries.

529 plans allow investors to save money in an account
in which the earnings grow income-tax deferred and
when used to pay for "qualified higher education
expenses" will be federal income tax-free.
529 Plans: What You Should Know
What is a 529 Plan?

In many states, participants receive state incentives,
including tax deductions and exemptions, based on
their participation in the in-state program(s).
529 Plans: What You Should Know
What is a 529 Plan?

There are 2 kinds of 529 plans:
PREPAID Plans
&
INVESTMENT/SAVINGS Plans
529 Plans: What You Should Know
What is a 529 Plan?
PREPAID PLANS

Purchase future tuition today at a lower rate
at any of a state’s eligible colleges or universities (or
equal payments to private
and out-of-state institutions).

These programs pool money and make long-range
investments so that earnings meet or exceed college
tuition increases in the home state.
529 Plans: What You Should Know
What is a 529 Plan?
INVESTMENT/SAVING PLANS

Allows participants to save money in a college savings
account to fund a designated beneficiary’s qualified
higher education expenses.

Contributions limits vary depending on the
characteristics of individual plans.
529 Plans: What You Should Know
What is a 529 Plan?

Plans offer a variable rate of return based on the
performance of the underlying investments.

Plans generally carry investment risk, which means
the account value may increase or decrease
depending on market conditions.
529 Plans: What You Should Know
At a Glance
QUICK STATS

Number of 529 College Saving
Plan Accounts: 7.2 million

Account Value: $64.6 billion

97 percent of 529 Plan assets are in mutual funds
Source: College Savings Plan Network, as of 9/30/04
529 Plans: What You Should Know
At a Glance
529 Plan Growth 1996-2005
Source: College Savings Plan Network, as of 9/30/04
529 Plans: What You Should Know
How 529 Plans Work

Individuals purchase interests in a trust established by
the state or its instrumentality.

Trust assets are invested according to the trust’s
stated investment objectives.

Issuers typically engage investment management
firms to manage the investment of trust assets.
529 Plans: What You Should Know
Who Sells 529 Plans?

Many states market their 529 Plans directly to
investors using state personnel.

In some states, investments may only be made
through state personnel; in others, investments may
only be made through broker-dealers; and in others,
investments may be made by either.
529 Plans: What You Should Know
Who Sells 529 Plans?

Most states engage broker-dealers to serve as primary
distributors for their 529 Plans.

In many cases, primary distributors enter into selling
arrangements with other broker-dealers to serve as
selling dealers to provide additional channels to
distribute securities to customers.
529 Plans: What You Should Know
How are 529 Plans Regulated?

Although most 529 Plans have been modeled after
mutual funds or "funds of funds," they are not subject
to regulation under the Investment Company Act.

529 College Savings Plans, when established by states,
are considered municipal fund securities and must
comply with rules issued by the Municipal Securities
Rulemaking Board (MSRB).

Pre-paid 529 Plans are not municipal
fund securities.
529 Plans: What You Should Know
How are 529 Plans Regulated?

The MSRB defines MUNICIPAL FUND SECURITY as:
“A municipal security issued by an issuer that, but for
section 2(b) of the Investment Company Act of 1940,
would constitute an investment company. Municipal
fund securities generally have features similar to
mutual funds and are not fixed income securities.
Interests in . . . 529 college savings plans are
examples of municipal fund securities.”
529 Plans: What You Should Know
How are 529 Plans Regulated?

Municipal fund securities are equity interests in an
independently managed pool of investments.
Investors realize gains or losses based on the
performance of the pool's underlying assets.

Although municipal fund securities are similar to
registered mutual funds, they are not subject to most
of the federal securities laws applicable to mutual
funds. This is because municipal fund securities
are issued by state or local governments, which
generally are exempt from these laws.
529 Plans: What You Should Know
How are 529 Plans Regulated?

Broker-dealers that effect transactions in municipal
fund securities must comply with:
–
–
–
MSRB rules
Anti-fraud provisions of the federal securities laws
Securities laws of individual states
529 Plans: What You Should Know
Issues
529 plans present all of the potential suitability,
disclosure and other sales practice issues as do
mutual funds.




Disclosure
Fees & Commissions
Suitability
Sales Practices
529 Plans: What You Should Know
Issues: Who’s Concerned






States
College Saving Plan Network
MSRB
SEC
NASD
Congress
529 Plans: What You Should Know
Issues: What’s Being Done






States: Exams, Board-level Project Group
College Saving Plan Network – Disclosure Guidelines
MSRB – Proposed rules
SEC – Task force, sweep
NASD - Sweep
Congress: Hearings
529 Plans: What You Should Know
Issues: Disclosure

MSRB Rule G-17:
–
Requires a broker-dealer to disclose at the point-of-sale all
material facts about the transaction known by the dealer, as
well as material facts about the security that are reasonably
accessible to the market.
–
Obligates a broker-dealer that sells to a customer an out-ofstate college savings plan to disclose that, depending upon
the laws of the customer’s home state, favorable state tax
treatment for investing in a college savings plan may be
limited to investments made in a college savings plan offered
by the customer’s home state.
529 Plans: What You Should Know
Issues: Disclosure

MSRB is seeking to broaden Rule G-17 point-of-sale
disclosure interpretation to:
–
Include references to other potential benefits of in-state
investments.
–
Suggest that customers consult with a qualified adviser or
contact his or her home state’s college savings plan to learn
more about any state tax or other benefits that might be
available in conjunction with an investment in that state’s
college savings plan.
529 Plans: What You Should Know
Issues: Disclosure

A broker-dealer would violate Rule G-17 by:
–
Informing a customer that investment in the college savings
plan of the customer’s own state did not provide the customer
with any state tax or other benefit when the dealer knows or
has reason to know that such benefit likely would be available.
–
Informing a customer that investment in the college savings
plan of another state would provide the customer with the
same tax or other benefits as would be available if the
customer were to invest in his or her own state’s plan, if the
dealer knows or has reason to know that this is not the case.
529 Plans: What You Should Know
Issues: Disclosure
VOLUNTARY CSPN GUIDELINES
 In December 2004, the College Savings Plan Network,
an affiliate of the National Association of State
Treasurers issued a series of voluntary disclosure
guidelines for 529 plans. The voluntary guidelines are
intended to:
–
–
–
establish a reference for basic disclosure practices
improve comparability between Plans
improve comparability, where applicable, between Plans and
direct investment in mutual funds
529 Plans: What You Should Know
Issues: Disclosure
VOLUNTARY CSPN GUIDELINES

Establish a framework for disclosure and specify
information that should be prominently stated, such
as:
– the lack of any state guarantee
– the need to consider state tax treatment and other
state-specific benefits
– the availability of other state 529 programs.
529 Plans: What You Should Know
Issues: Fees & Commissions

All 529 plans charge fees and expenses.These costs not only vary
among 529 plans but also can vary within a single 529 plan. Fees
may include:
– enrollment charges
– annual maintenance fees
– sales loads
– deferred sales charges paid when investors withdraw their
money
– administration and management fees
and underlying fund expenses.
529 Plans: What You Should Know
Issues: Fees & Commissions

Advisor-sold plans often cost more than direct-sold
plans.

Some broker-sold college savings plans, like some
mutual funds, have different share classes (Class A, B,
C, etc). Each class has different fees and expenses.
529 Plans: What You Should Know
Issues: Fees & Commissions

MSRB Rule G-30(b), on prices and commissions in
agency transactions, prohibits broker-dealers from
selling municipal securities to a customer for a
commission or service charge in excess of a fair and
reasonable amount.

What’s “fair and reasonable?”
529 Plans: What You Should Know
Issues: Fees & Commissions

MSRB Rule G-30(b)rule provides for considering a
number of relevant factors, including:
–
–
–
the expense of executing the order
the value of services provided, and
the amount of any other compensation received by
the broker-dealer from others (such as the
state plan or the primary distributor).
529 Plans: What You Should Know
Issues: Suitability
• MSRB Rule G-19 requires a broker-dealer that
recommends to a customer an investment in a 529
college savings plan to have reasonable grounds for
believing that the recommendation is suitable,
based on information available about the
investment and information on the customer’s
financial status, tax status, investment objectives
and other relevant information.
529 Plans: What You Should Know
Issues: Suitability
SUITABILITY ON THREE LEVELS
• 529 Plans vs. other investment alternatives
• In-state plan sales vs. out-of-state plan sales
• Underlying investments
529 Plans: What You Should Know
Issues: Suitability
• The MSRB has stated that broker-dealers must
remember that 529 Plans are designed for a
particular purpose and this purpose should match
the customer’s investment objective.
• For example, broker-dealers should bear in mind
potential tax consequences for customers who
invest in a 529 Plan but may not intend to use the
funds for qualified higher education expenses.
529 Plans: What You Should Know
Issues: Suitability
Other factors to consider to determine suitability:
• The age of the account’s designated beneficiary;
• The number of years until funds will be needed to
pay qualified higher education expenses.
529 Plans: What You Should Know
Issues: Suitability
• Broker-dealers must consider the appropriate share
class for a particular customer.
• The number of years until withdrawals are
expected to be made can be a significant factor in
determining which share class would be suitable for
the particular customer.
• Broker-dealers also are prohibited from
recommending excessive or frequent
transactions .
529 Plans: What You Should Know
Issues: Sales Practices
• PROBLEM AREA: Sales of out-of-state plans.
• In 2003, the NASD conducted a review of sales
practices used by broker-dealers to market 529
Plans.
• The review focused on six firms, based on the
number of customer complaints and sales
volume.
529 Plans: What You Should Know
Issues: Sales Practices
Preliminary NASD Sweep Findings
• During the review period, the firms sold
approximately $2.1 billion worth of 529 plans.
• The vast majority of sales were made to residents
outside of the state that sponsored the 529 plan.
529 Plans: What You Should Know
Issues: Sales Practices
Preliminary NASD Sweep Findings
• More than 90 percent of the sales by some of those
firms were to out-of-state residents, despite
the fact that about half of the states give a
state tax deduction to their citizens for
contributions to the home state's 529 plan.
529 Plans: What You Should Know
Resources for Regulators
College Savings Plan Network
The College Savings Plans Network
formed in 1991 as an affiliate to the
National Association of State
Treasurers. CSPN serves as a
clearinghouse for information among
existing college savings programs.
Additionally, CSPN monitors federal
activities and promotes legislation that
will positively affect state programs.
www.collegesavings.org
529 Plans: What You Should Know
Resources for Regulators
Municipal Securities Rulemaking Board
www.msrb.org
The MSRB was established in 1975 by
Congress to develop rules regulating
securities firms and banks involved in
underwriting, trading, and selling
municipal securities. Composed of
members from the municipal securities
dealer community and the public, MSRB
sets standards for all municipal
securities dealers. MSRB is is a selfregulatory organization that is subject
to SEC oversight.
529 Plans: What You Should Know
Resources for Regulators
Saving for College.com
www.savingforcollege.com
Savingforcollege.com LLC offers
independent and objective
information about 529 plans and
other ways to save and pay for
college. The website, operated
by founder Joseph Hurley CPA,
is designed to help individuals
and professional advisers better
understand 529 Plans and is not
affiliated by ownership with any
other company or organization.
529 Plans: What You Should Know
Resources for Regulators
NASAA, along with the College
Savings Plan Network and the
Investment Company Institute,
have published A Guide to
Understanding 529 Plans.
The brochure is available on the
NASAA website in the Investor
Education Section’s Financial
Education Resources page.
www.nasaa.org/investor_education/Financial_Education_Resources
529 Plans: What You Should Know