"I don't even like thinking about it," says Mayernick, an advisor with Northwestern Mutual in Nashville, Tenn. "But it's a big priority for us."
Mayernick and his wife Suzanne are counting on seven 529 plans to help them do it - one for each of their children, who range from 4 to 16 years. (The couple have four biological children, two adopted in the U.S. and one adopted from Uganda.) Mayernick has used the tax-deferred college savings plans for his clients since they became available in 1996. He estimates that, without them, he might have to save an extra $200,000 for his family. "They do play a critical role," he says.
His reliance on 529s, though, puts him in the minority of American savers. Many parents and planners, who often make little to no commission from 529s, have avoided using them to their fullest extent. Of the roughly $611 billion Americans saved to pay for college as of the fourth quarter of 2011, just 27%, or $164 billion, was growing in 529 plans, according to estimates from Financial Research Corp.
"I think these plans are basically, if not in their infancy, then in their toddlerhood," says Joan Marshall, executive director of the College Savings Plan of Maryland, one of Morningstar's six top-rated 529 plans in the country.
States and educational institutions offer the plans as part of a broad, 16-year-old public policy initiative to encourage more saving for college. Yet, even Morningstar, which began tracking the funds in 2004, just started to rate them in 2010. "Over half of Americans do not know what a 529 plan is," says Kris Spazafumo, senior manager of 529 plans at Capital Group Cos. in Los Angeles. The company runs the advisor-sold plan known as CollegeAmerica sponsored by the state of Virginia. With $33 billion in AUM, it's the nation's single largest plan. "Clearly we have an issue when it comes to college savings," Spazafumo says. "That is where advisors play such an active role."
Blame the volatile markets over the last decade for much of the plans' poor use. Meager long-term returns - as well as short-term losses - killed off one of their key selling points: tax-deferred growth. "If you don't have a great market run, then so what?" asks planner Susan Stiles, of Stiles Financial Services in Edina, Minn. As with many advisors, Stiles has used fewer 529s in the last 10 years.
But as the markets have rebounded, so have the plans. In 2011, Morningstar found that money directed into 529s climbed 12%, versus just 1% for the U.S. equity market and 5% for bonds.
A host of advantages are driving this growth, which vary dramatically among states and plans. Investors can withdraw money from 529s tax-free to cover any higher educational expense - from tuition and books to campus housing costs and equipment such as computers - associated with attending an accredited school. In many states, 529 deposits can be deducted from state income taxes up to certain amounts. In a bankruptcy, creditors generally can't touch the contents of 529s, making them safe harbors for protecting the next generation's future.
The accounts also can be transferred without penalty from one child in a family to another, depending on who ultimately attends college. They also can be transferred from child to grandparent, from child to a child's spouse, to first cousins and even back to any parent or grandparent who decides to go back to school.
"They are one of the true investing no-brainers," says planner Douglas Ciocca, chief executive of Kavar Capital Partners in Leawood, Kan., who uses them for his clients as well as his three children.
Many financial experts think it's time that investors depend more heavily on 529s, given that student debt crested $1 trillion this year and tuition costs continue to grow at double the rate of inflation.
"The colleges are posting a sticker price [for tuition]," says Deborah Fox, an expert in college financing and the founder of Fox College Funding in San Diego. "The families that have taken the time to be informed about how the system works are the ones that tend to pay significantly less than the families that don't."
Many families don't use 529s because of the high learning curve. Understanding 529s has become a planning subspecialty in its own right. Of the 83 plans available nationwide, half are "direct sold,'' meaning investors must be smart do-it-yourselfers and set them up themselves. Even with advisor-sold 529s, planners often find it too cumbersome to navigate their intricacies, especially if they carry low commissions. As the number of fee-only and fee-based planners grows with the expected adoption of a fiduciary standard industrywide, there are more reasons for planners to employ this savings tactic.
