Thursday, September 10, 2009
The Treasury Dept. released today AN ANALYSIS OF SECTION 529 COLLEGE SAVINGS AND PREPAID TUITION PLANS, A REPORT PREPARED BY THE DEPARTMENT OF TREASURY FOR THE WHITE HOUSE TASK FORCE ON MIDDLE CLASS WORKING FAMILIES. The Report discusses the benefits of 529s, the extent to which Section 529 plans serve various income groups, and how well the plans keep costs low so to maximize returns to savers. In addition, the report highlights exemplary practices and makes a set of recommendations on how to make Section 529 plans more effective and reliable. Here are the principal recommendations:
• Provision of Age-Based Index Funds. Age-based investment funds are very popular and are well suited to the circumstances of many middle class families that are saving for college. Yet five of the 48 states offering a direct sold savings plan do not offer an age-based fund. Moreover, only 23 of the 43 states that do offer an age-based fund offer it in the form of index funds. Historically, index funds have performed well relative to actively managed funds because they have low fees, and they are especially well suited for investors who do not wish to spend time acquiring information and evaluating the investment philosophy and track records of actively managed funds.
• Eliminate Home-State Bias. If home-state bias in state tax and student aid policies were eliminated, the result would be more investment options for consumers, more intense competition between plans, and very likely lower fees. To the extent that there are economies of scale in plan administration, consumers will also benefit from additional scale and lower costs.
• Per Beneficiary Contribution Limits. Currently there are effectively no limits on Section 529 account balances. Because 43 states offer plans open to residents in other states, a beneficiary can have accounts in as many as 44 states, each state with a limit exceeding $224,465. Putting an effective limit on Section 529 contributions requires making the limits per beneficiary rather than per beneficiary per state. Per beneficiary limits would reduce the tax benefits to high income families and, by lowering federal tax expenditures for the program, would potentially free up federal resources for education aid that could be targeted to low and middle income families. Per beneficiary limits would best be enforced at the time distributions are made. Specifically, each distribution for a particular beneficiary’s qualified educational expenses would be divided into a principal portion counting against the contribution limit and an earnings portion. At such time as a beneficiary reaches the contribution limit, distributions would be nonqualified and subject to penalty.