Retirement Products Increase College Financial Planning Market ShareBy Paul Curley, CFA | firstname.lastname@example.org | December 12, 2019
529 college investment plans remain the vehicle most strongly associated with college financial planning, and for good reasons. Despite that, other structures, including retirement products, play an important role in the college savings markets.
529 college investment plans remain the vehicle most strongly associated with college financial planning, and for good reasons. Investors stand to gain from using local tax breaks alongside 529s tax-deferred growth to pay for qualified expenses. Despite that, other structures including retirement products play an important role in the college savings markets.
According to data from ISS Market Intelligence, 529 college savings plans have experienced significant and continuous long-term growth, reaching $311 billion at the end of 2018 compared to $227 billion five years earlier. Surveys from parents have consistently found that the total assets invested for college savings across other investment vehicles are significant, prevalent and rising as well.
Exhibit 1 below reports the total college savings market size at an estimated $1.2 trillion at the end of 2018, a growth rate of about 2% over the previous year and about 36% higher since 2014. 529 assets saw a decrease of 2% in 2019, compared to an increase of 3% for non-529 vehicles. Assets in non-529 vehicles continue to tower over assets in college savings plans at $890 billion at the end of 2018, pointing to the unnecessarily high tax burdens that many college savers face on the federal and state level. Surveys fielded by ISS Market Intelligence have further backed up this disparity. Among the 59% of surveyed parents who stated they were saving for college, 27% were saving through 529 savings or prepaid plans, while 32% were saving for college with something other than a 529 plan. These numbers demonstrate the substantial market available to 529 product providers and distributors. Stated differently, the majority of parents are not saving for higher education, not saving enough, or not saving in the most efficient vehicle.
Assets held in non-529 vehicles are approaching $1 trillion, showing the substantial, unnecessary tax burdens faced by college savers.
Exhibit 2 reports the breakout of the $1.2 trillion college savings market by investment vehicle type based on the survey of parents used in the ISS Market Intelligence 529 Consumer Survey 2019. The numbers suggest that parents may be prioritizing convenience when savings for college. Rather than evaluating multiple vehicles and their college savings suitability, they are storing assets in vehicles with which they already interact. Families have been increasing their usage of 401(k)s and IRAs to save and pay for higher education. The largest investment type in the college savings market also emphasizes the returns that non-529 savers are missing out on. Cash and other banking products have consistently ranked as the most used vehicle, while also providing some of the lowest returns. These low-yielding options may do little to ease the burden of savings and paying for college or graduate school. 529 product providers can highlight a wide variety of advantages the vehicle has compared to these other savings options, including better returns, improved tax efficiencies, and financial aid implications. These factors combined with the escalating pressure of rising student loan debt provide numerous sales opportunities for 529 plans in the future.