I previously mentioned in a monthly call that we are scheduled for our every 2 year FINRA exam in mid-September. The requests are already coming in for
documents and I will bring items to your attention periodically that may be pertinent.
One recent request of interest from FINRA was on 529 Plans. As some of you recall from the SEC exam, the regulators are focusing on ensuring that clients
are placed in the appropriate share class for funds/VAs and want to see that advisors have provided and documented with their clients all share class
options and costs of these classes before the purchase occurs (i.e. go over the types of share classes with your clients and document it through use
of FINRA's analyzers would be one example, see below). Therefore, please make sure you are keeping notes of your meetings in case you are requested
to provide them to support your client's transactions. In my opinion, FINRA is following suit in the full disclosure realm of the DOL to anticipate
a fiduciary standard for all products in the near future (of course, once we get through with qualified accounts).
As you recall from our previous reminder earlier this year on the FINRA Fund Analyzer for mutual funds, there is a 529 Expense Analyzer that can be found at this link: http://apps.finra.org/investor_Information/Smart/529/Calc/529_Analyzer.asp You can calculate/compare the costs for up to two 529
Plans with this anaylzer. As with mutual funds, I recommend that you keep a copy of the results of the analyzer in your client's file and have the
client sign/date a copy of it to show their review of it with you. Keep in mind that as with mutual funds, 529 C shares may not be appropriate from
a cost perspective for a client with a longer time horizon to use the funds due to the higher annual distribution fee and overall annual expenses for
C shares versus A shares.
In addition to share classes and costs, FINRA is also looking at any recommendations made that will disadvantage clients if their state offers state tax
advantages for a local plan and the client chooses to go out of state. Keeping notes of any divergence from choosing an in-state program for a client
should be documented as a client's deductions or credits on peronal income tax returns ould be affected with non-in-state contributions, if applicable.
Remember --- 529s are considered municipal products.
A 2014 SEC Investor Publication is attached that provides additional guidance for 529s and below is a brief refresher on 529s from FINRA:
529 College Savings Plans
There are two types of 529 plans—college savings plans andprepaid tuition plans.
The college savings version allows earnings to grow tax-deferred and withdrawals are tax-free when used for qualified education expenses. Every state
offers at least one of these types of plans. Some states offer both, anda consortium of private collegesalso offers a prepaid tuition plan.
With college savings plans, students of all ages can save for all college costs, including tuition, fees, room, board, textbooks and computers (if required
by the school).
Not Just for Children
If you are considering going back to college or graduate school, you can open a college savings plan for yourself. You will save on taxes, and if you end up not going to school, you can always transfer the money, tax-free, to another 529 plan for your children or spouse.
Not Limited to In-State Public Colleges or State Residents
Withdrawals from college savings plans can be used at most colleges and universities throughout the country, including graduate schools. Some overseas
educational institutions also may be eligible. Many states now offer at least one college savings plan that has no residency restrictions. You can
live in Ohio, contribute to a plan in Maine and send your child to college in California. However, if your state offersstate tax advantagesto residents who participate in the local plan, you'll miss out if you opt for another state's 529 plan.
Covered Education Expenses
College savings plans typically cover all "qualified education expenses" at eligible colleges, universities and other post-secondary institutions, including:
Books and supplies
Equipment required by school
Room and board
Computers (including tablets) and peripherals such as printers, and education software.
When you invest in a college savings plan, you pay money into an investment account on behalf of a designated beneficiary. Contributions can vary and are
only limited by the maximum and minimum contribution limits set by most plans. Although the maximum contribution amount differs from state to state,
in the majority of states offering college savings plans, the maximum amount that you can contribute for one beneficiary exceeds $250,000.
To further increase the amount of contributions you can make, you can open a second college savings plan in another state. Currently, the IRS only requires
that contributions for one child cannot be more than the amount necessary for the qualified higher education expenses of that child. So if you want
your child to go to an expensive college and graduate school, one option you have is to open more than one college savings plan.
Most states also offer very flexible minimum contribution limits. Many require a $250 initial contribution with subsequent contributions of as little as
$50. These minimum contribution amounts can be reduced even further in many states if you make contributions through payroll deductions or automatic
transfers from a bank account.
Typically, each plan gives you a number of investment options that allow you to invest in various mutual fund and exchange-traded fund portfolios. Some
college savings plans offer age-based fund portfolios. When the child is younger, the portfolio typically invests mostly in stock funds, which carry
a higher risk, but higher return potential. As your child grows older, the asset allocation becomes increasingly conservative as it gradually shifts
to bond funds and other fixed-income funds.
Many states also offer non-age-based investment options, allowing you to select portfolios with conservative, moderate and aggressive asset allocations.
Some states also offer investment options that allow you to invest in certificates of deposits whose interest rates are linked to an index that measures
the average cost of college tuition.
The IRS allows you to change your investment options once every calendar year in a college savings plan and when there is a change in designated beneficiary.
Investing in college savings plans does come with some risk. Unlike prepaid tuition plans, they don't lock in tuition prices. Nor does the state back or
guarantee the investments. There also is the risk with most college savings plan investment options that you may lose money, or your investment may
not grow enough to pay for college. For example, if you choose a plan option that invests in stock mutual funds, chances are that your invested funds'
annual performance will mirror the trends of the stock market. Thus, you may lose money during a declining market.
Fees, Charges and Expenses
All 529 college savings plans have fees and expenses. Not only do these charges varyamong529 plans, but also they can varywithina single
plan. Like mutual funds, a single college savings plan may offer more than one “class” of shares to investors. Often referred to as A, B or C classes,
units or fee structures, each class has different fees and expenses. You can look at the offering document to see if a particular college savings plan
offers more than one class.
Higher fees and expenses can make a big difference in the value of your investment over time. Let's say you invest $10,000 in a college savings plan with
a return of 8 percent before expenses. With a plan that had annual administration and operating expenses of 2 percent, after 18 years, you would end
up with $27,880. If the college savings plan had expenses of only 0.65 percent, you would end up with $35,548—an additional $7,668.
529 Expense Analyzer
Use FINRA’sexpense analyzer to compare how sales loads, management fees, underlying fund fees and other plan expenses can impact returns.
Here's a list of some of the most common fees, charges and expenses found in college savings plans:
Enrollment Fee.Many college savings plans do not charge an enrollment fee. Almost all enrollment fees are $50 or less.
Annual Maintenance Fee. Most college savings plans charge annual maintenance fees. These fees usually range from
$10 to $25. Many plans reduce or eliminate this fee for residents, if you make automatic contributions or if you maintain a certain balance, typically
Sales Charge (Front-End Sales Load).Several college savings plans charge a sales charge when you buy certain investment options within
a plan or purchase a plan through a broker or investment adviser instead of directly from the state. Generally, you can determine the sales load by
looking at the fees and expenses section of the offering circular or prospectus. Not every plan has a sales load. In some plans, a sales charge may
only be levied on certain share classes of the plan.
Get a Break on Front-End Sales Loads
Like mutual funds, Class A shares of college savings plans often offer discounts that reduce the front-end sales loads you pay. The investment levels
at which the discounts become available are calledbreakpoints. The amount of the discount is based on the size of your investment,
and the discount increases as the size of your investment increases.
Deferred Sales Charge.A deferred sales charge or contingent deferred sales charge (CDSC) is a charge you pay when you withdraw money from
an investment option or college savings plan. It is sometimes referred to as the back-end load. The charge may start out at 2.5 percent for the first
year, and get smaller each year after that until it reaches zero. Generally, you can determine the deferred sales charge by looking at the fees and
expenses section of the offering circular or prospectus. Not every college savings plan has a deferred sales charge. In some plans, a deferred sales
charge may only be levied on certain classes of the plan.
Administration/Management Fee. This is the total annual college savings plan operating expenses expressed as a percentage
of the plan's assets. For example, an expense ratio of 1 percent represents an annual charge to the plan's assets—including your proportional
interest in those assets—of 1 percent per year.
Underlying Fund Expenses.Because college savings plan portfolios typically invest in a number of mutual funds, they bear part of the fees
and expenses of these underlying funds. This expense is expressed as a percentage of a mutual fund's assets. Because college savings plan investment
portfolios sometimes invest in a number of mutual funds, the offering circular or prospectus may contain fund expense percentages for each of these
SEC Investor Alert - 529 Plans 1-6-14.pdf