Education costs are going through the roof. Four years of private college today runs about $150,000. And for anyone born today, the cost will be about $440,000 by the time they arrive at those hallowed halls.
Are you talking to your clients about this bill on their horizon?
Even if it seems distant, you should be preparing them. And with taxes most likely on their way up, there’s no better time than the present to start discussing the tax-deferred options out there.
The most common is the 529 college savings plan and it should be a topic of conversation with any client who has young children. It’s not just higher education that’s at issue here. The main lesson for advisors is continuing education of their clients, said Paul Curley, research analyst at Financial Research Corp.
The tax-deferral feature of 529s will definitely be more attractive in the coming years as clients look for more ways to offset their tax burden. But 529 plans are complex, and advisors need to keep clients on tract. (For more detail on 529s, check out our feature story, “Pumping Cash into 529 College Savings Plans” in the upcoming November issue of On Wall Street).
Each state offers 529 plans, but they are all different in their details. Some states offer matching funds, up to a certain point; some offer various plans for state residents and others for out-of-state investors; and some even offer FDIC-insured options. One recent example comes courtesy Putnam Investments, which rolled out a plan that includes the choice of an absolute return mutual fund. It’s part of Nevada’s 529 offerings, but families anywhere in the U.S. can buy it.
Much of your discussion with clients will come down to (what else?) risk tolerance. A lot of the plans are segmented by age depending on the age of the child when you begin saving: two to four; four to six; and so on. They’re similar to target-date mutual funds in that regard, except the end goal is college, not retirement.
But they sometimes carry one other similarity to target-date funds. Even though they ratchet down the risky holdings as college draws closer, they are sometimes still too aggressive in the allocation mix. That is, they haven’t ratcheted down enough. So one badly-timed market downturn can be devastating. If it happens at just the wrong time, the account has very little time to make back gains since the end goal is four years of college, as opposed to a (hopefully) long retirement.
Still, your client may well want a bit of aggressiveness to help keep up with those ballooning costs of college.
All of which means you need to be having detailed discussions with clients on their risk tolerance and their various options.
One general rule though is to start young. Clients shouldn’t wait until the kid is in high school, or even junior high. Start by the age of 10, at the oldest, to set up a plan. And if by chance the kid decides that college isn’t for him, you can change the beneficiary on the account to someone else. It can even be used by an adult who is going through a re-training phase of their career.
The assets in 529 plans are expected to hit $247 billion by 2014. (They were at $88 billion as recently as 2008). So they’re gaining in popularity, but questions around them still abound. These should be prominent in discussions with clients.