What was the most important 529 legislative update in 2017, and what was the 529 market sizing as of 4Q 2017?
Legislative Update: On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act (H.R. 1) which would create tax reform and implement several material changes to 529 plans and ABLE accounts including:
– Allows 529 qualified distributions for K-12 tuition up to $10,000 per year per beneficiary (excluding home schooling) at the Federal level
– Allows rollovers from 529 plans to ABLE accounts
– Allows Coverdell Education Savings Accounts to remain open
These components would expand the ability of 529s to help families in the education financial planning process, and hence provide some ability for families to reduce or eliminate the use of student loan debt in the paying for college process. Additionally, the expansion of qualified distributions of 529s from higher education and graduate school to include elementary or secondary schools (including K-12 public, private or religious) broadens the mission of 529s from college financial planning to education financial planning.
Market Sizing Highlights:
– 13.4 million accounts invested $319 billion assets in 529 savings and prepaid plans as of December 2017
– 12.3 million accounts invested in $294 billion assets in 529 savings plans as of December 2017
– 1.1 million accounts invested in $25 billion assets in 529 prepaid plans as of December 2017
There are two types of 529 plans, including 529 savings plans and 529 prepaid plans. 529 prepaid plans provide families with the opportunity to pay today for tuition and specified fees tomorrow. Therefore, they allow families to lock in, or prepay, the future cost of college. While there are only 19 529 prepaid plans, there are currently 90 529 savings plans that allow families to make contributions into an account that fluctuates in value with the performance of the investments selected. As such, 529 prepaid plans allocate the market risk to the state entity issuing the plan while 529 savings plans allocate the market risk to families. This is why some investors that are familiar with the retirement industry compare 529 prepaid plans to defined benefit accounts, and 529 savings plans to defined contribution accounts.
Total 529 savings plan assets were an estimated $319 billion as of the end of 2017, reflecting a 4.3% increase from 3Q 2017 assets of $282 billion and a 16.9% increase from year-end 2016 assets of $252 billion. In comparison to broad index returns, the S&P 500 increased by 6.6% in 4Q 2017 while the Barclays Aggregate Bond Index increased 0.39%.
Estimated 529 net inflows were $3.1 billion in 4Q 2017 compared to net inflows of $2.7 billion in 4Q 2016 and net inflows of $2.6 billion in 4Q 2015, which aligns with more parents successfully using 529s for their intended purpose of qualified higher education expenses (such as tuition, books and room & board).
The graph above provides 529 savings plan industry assets and net flows for the last nine quarters. This chart reflects year-over-year highs in assets under management and therefore usage of 529 plans by families. 529 savings plans have successfully helped families to efficiently save for their higher education goals in terms of tax, financial aid and estate planning.
From an industry asset level perspective, 529 saving plans continue to reach year-over-year highs. Therefore investor interest in 529 plans and saving for education in a tax-efficient manner continues to rise, and especially as part of year-end tax planning and college financial planning.
The chart below provides data on the Top 5 529 Savings Plan Program Managers by 4Q 2017 Assets.
Source: Strategic Insight
The chart below provides data on the Top 10 529 Savings Plan Program Managers by 4Q 2017 Assets.
Source: Strategic Insight