ICI: 529 Plan Penetration Has a Long Way to Go

Two-thirds of America’s parents are currently stashing away for their children’s college education and 80% cite saving foreducation as one of their household financial goals, behind saving for retirement and providing for emergencies. However, when asked the saving vehicle of choice, 90% said their children’s future educational money is current held in taxable accounts, according to the Investment Company Institute’s (ICI) Profiles of Households Saving for College.

It is not that 529 plans are not on the radar screen – nearly two-thirds of the responding parents saving for college are aware of these savings programs. It is that few have taken the chance to open such an account; only 8% of those parents that identified themselves as saving for college. However, the silver lining on the small participation numbers is that more than one-quarter of those parents indicate that they are likely to open one in the next 12 months.

Decision Time

For the 8% that have opened the account, the decision was based on a myriad of sources. Most common among decisionmaking factors was the advice of a professional financial adviser (64%), followed by newspaper, newsletter or magazine articles (56%), brochures, advertisements or the Web site of the state offering the plan (54%) and official statement or document of the plan issued by the state (53%). Other sources included:

• 46% – brochures, advertisements or the Web site of financial services company
• 43% – Internet
• 37% – family or friends
• 22% – books
• 18% – television or radio
• 18% – employer
• 8% – seminar or presentation
• 2% – other sources.

Once the research was done, parents were most drawn by the fact that theirchild would have ultimate flexibility in where they choose to pursue their higher education (90%), followed very closely by the types of investments offered in the plan (89%). Other decision factors included:

• 84% – tax advantages received for investing in the plan
• 75% – level of fees charged by the plan
• 69% – account is not controlled by the beneficiary
• 64% – recommendation from professional advisor
• 60% – maximum total amount that can be contributed to the plan
• 56% – investing in home state’s college savings plan
• 44% – option to have contributions automatically deducted from paycheck.

Open Account

Opening the account, the majority (51%) went through the sales force, compared with 26% that opened their account through the state offering the plan, 18% from a direct market and only 7% through their employer. Most common among the sales force agents were full service brokers (22%), followed by independent financial planners (19%), bank or savings institutions (10%) and insurance agents (3%).

Among the group that has active 529 plans, 44%had one plan account, 42% had two plan accounts, and 14% had three or more plan accounts, with both the median and mean number of 529 plan accounts per household coming in at two. For the most part, these plans were opened after 1995 (83% versus 17%), with the majority being opened in only the past couple of years (63%).

Ownership of these plans tends to be concentrated in the state in which the parent resides. Eighty percent said they own in-state 529 college savings plans only and 20% own out-of-state plans only. But when it came to considerations, both option were weighted fairly equally, with 48% saying they considered only the home state’s offering, 46% considering both the home state’s and another state’s plan and 6% that looked at only other states’ 529 plans. Also, the majority (51%) of parents with the state-sponsored college savings 529, did not really give much thought to the prepaid tuition 529, with 21% giving very little consideration to this type of plan, 25% some extent and only 3% great extent.

A complete copy of ICI’sProfiles of Households Saving for College report can be found at http://www.ici.org/pdf/rpt_03_college_saving.pdf .