529 College Savings Plans What You Should Know

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529 College Savings PlansWhat 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

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529 Plans What You Should KnowWhat 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.

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529 Plans What You Should KnowWhat 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).

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529 Plans What You Should KnowWhat is a 529
Plan?

• There are 2 kinds of 529 plans
• PREPAID Plans
• INVESTMENT/SAVINGS Plans

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529 Plans What You Should KnowWhat is a 529
Plan?

• PREPAID PLANS
• Purchase future tuition today at a lower rateat
  any of a states eligible colleges or
  universities (or equal payments to privateand
  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.

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529 Plans What You Should KnowWhat is a 529
Plan?

• INVESTMENT/SAVING PLANS
• Allows participants to save money in a college
  savings account to fund a designated
  beneficiarys qualified higher education
  expenses.
• Contributions limits vary depending on the
  characteristics of individual plans.

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529 Plans What You Should KnowWhat 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.

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529 Plans What You Should KnowAt 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

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529 Plans What You Should KnowAt a Glance

• Source College Savings Plan Network, as of
  9/30/04

529 Plan Growth 1996-2005
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529 Plans What You Should KnowHow 529 Plans Work

• Individuals purchase interests in a trust
  established by the state or its instrumentality.
• Trust assets are invested according to the
  trusts stated investment objectives.
• Issuers typically engage investment management
  firms to manage the investment of trust assets.

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529 Plans What You Should KnowWho 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.

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529 Plans What You Should KnowWho 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.

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529 Plans What You Should KnowHow 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 municipalfund
  securities.
•  

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529 Plans What You Should KnowHow 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.

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529 Plans What You Should KnowHow 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. 

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529 Plans What You Should KnowHow 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

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529 Plans What You Should KnowIssues

• 529 plans present all of the potential
  suitability,
• disclosure and other sales practice issues as do
• mutual funds.
• Disclosure
• Fees Commissions
• Suitability
• Sales Practices

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529 Plans What You Should KnowIssues Whos
Concerned

• States
• College Saving Plan Network
• MSRB
• SEC
• NASD
• Congress

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529 Plans What You Should KnowIssues Whats
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

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529 Plans What You Should KnowIssues 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-of-state college savings plan to
  disclose that, depending upon the laws of the
  customers 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 customers home
  state. 

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529 Plans What You Should KnowIssues 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 states
  college savings plan to learn more about any
  state tax or other benefits that might be
  available in conjunction with an investment in
  that states college savings plan.

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529 Plans What You Should KnowIssues Disclosure

• A broker-dealer would violate Rule G-17 by
• Informing a customer that investment in the
  college savings plan of the customers 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 states plan, if
  the dealer knows or has reason to know that this
  is not the case. 

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529 Plans What You Should KnowIssues 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

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529 Plans What You Should KnowIssues 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.

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529 Plans What You Should KnowIssues 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.

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529 Plans What You Should KnowIssues 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.

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529 Plans What You Should KnowIssues 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.
• Whats fair and reasonable?

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529 Plans What You Should KnowIssues 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 thestate
  plan or the primary distributor).

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529 Plans What You Should KnowIssues
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 customers
  financial status, tax status, investment
  objectives and other relevant information.

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529 Plans What You Should KnowIssues
Suitability

• SUITABILITY ON THREE LEVELS
• 529 Plans vs. other investment alternatives
• In-state plan sales vs. out-of-state plan sales
• Underlying investments

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529 Plans What You Should KnowIssues
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 customers 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.

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529 Plans What You Should KnowIssues
Suitability

• Other factors to consider to determine
  suitability
• The age of the accounts designated beneficiary
• The number of years until funds will be needed to
  pay qualified higher education expenses.

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529 Plans What You Should KnowIssues
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 frequenttransactions .

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529 Plans What You Should KnowIssues 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.

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529 Plans What You Should KnowIssues 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.
  

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529 Plans What You Should KnowIssues Sales
Practices

• Preliminary NASD Sweep Findings
• More than 90 percent of the sales by some of
  those firms were to out-of-state residents,
  despitethe fact that about half of the states
  give astate tax deduction to their citizens for
  contributions to the home state's 529 plan.

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529 Plans What You Should KnowResources 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
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529 Plans What You Should KnowResources for
Regulators

• Municipal Securities Rulemaking Board

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
self-regulatory organization that is subject to
SEC oversight.
www.msrb.org
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529 Plans What You Should KnowResources for
Regulators

• Saving for College.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.
www.savingforcollege.com
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529 Plans What You Should KnowResources 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 Sections
Financial Education Resources page.
www.nasaa.org/investor_education/Financial_Educati
on_Resources
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529 Plans What You Should Know