April 2, 2013

The 411 on 529 college investments

Ex-state senator promotes Georgia plan

By Christopher Smith

— A college degree is a “gateway to dreams fulfilled,” said former state senator Mitch Seabaugh, R-Sharpsburg.

But the key to the gateway — tuition — is becoming harder to pay for.

Seabaugh said the state has something to ease the burden: The Path2College 529 investment plan. A 529 is a state-run investment program that lets people save for college similar to using a 401(k) plan to save for retirement.

Seabaugh, the plan’s state director, spoke to the Kiwanis Club of Dalton at the trade center Monday during a statewide tour to promote the program.

His promise?

“The worst that could happen is people start saving for a college education,” Seabaugh told the Kiwanis members.

But are there risks? After all, many national media outlets reported several 529 plans went belly up after the recession began in 2007 because the investment plans relied too heavily on stocks and bonds that today continue to struggle in their recovery.

“Well, all investment products have a definite risk,” Seabaugh, said when asked about the stability of 529 plans. “But if you do your homework and look at the history of the company managing these accounts you can see that the risk is very low.”

Seabaugh said the state uses New York-based Teachers Insurance and Annuity Association-College Retirement Equities Fund (TIAA-CREF) as the program manager to “separate the money from state holdings to a private company (so) the state or federal government can’t get their hands on the investments money because some states run their own program and hold on to the money.”

TIAA-CREF is a multi-billion dollar investment firm founded in 1918. It oversees various investments throughout the nation including several state 529 plans. Seabaugh believes the Fortune 100 company’s survival through the Great Depression is proof of its reliability.

“I think Georgia’s 529 plan is one of the lowest risks in the world of investments,” Seabaugh said. “TIAA-CREF is very conservative as to investment options they have and their terms ... It’s not a get rich quick scheme, but TIAA-CREF is entrusted with a lot of education retirement accounts so they manage a lot of money ... the important thing is that we work with a reputable firm.”

Lynn Laughter, a local financial adviser of 20 years and former chair of the Greater Dalton Chamber of Commerce, said she’s “never been too impressed with TIAA-CREF’s investment management.”

“I’ve been doing 529 plans for a long time,” she said. “When I looked at clients’ accounts, TIAA-CREF’s performance hasn’t been great. Now, I haven’t looked at (those kinds of accounts) in awhile, but that’s how I feel ... all advisors have their favorates and they are not one of my favorites.

“Georgia was one of the last states to get (a 529). When Georgia’s plan came out, you couldn’t get the benefits they now have. I will say it is much more friendly now. The big things is they give tax breaks now (you can deduct up to $2,000 off state taxes regardless of income status) ... picking a 529 really depends on the investor and what they want.”

According to the Morningstar website — a outsider company that ranks 529 plans by state — the Path2College 529 investment plan has a “bronze” status, which indicates how well the investment returns and “outperforms” similar programs. The rating system includes gold, silver, bronze, neutral and negative.

TIAA-CREF was the program manager for two other 529 plans: The Michigan Education Savings Program, with a silver rating, and the Minnesota College Savings Plan, with a  negative rating.

“The people at Morningstar feel like we have a very good plan,” Seabaugh said when asked about TIAA-CREF’s sporadic ratings. “Any state that gets a medal ... is expected to outperform the average investment in the industry.

“The factors that keep the state of Georgia from (gold status) is that we (state officials) have not kept up like we probably should have with the amount of tax deductions you can take off state taxes. We’re trying to increase it up from a limit of $2,000. Other states have also increased the total amount you can put into a plan. Ours is limited to $235,000 ... those are the two things keeping us from a gold status.”

Asked how those caps could be increased, Seabaugh said “that’s up to the (state) legislators. It’s important to note there’s only four states (Alaska, Maryland, Nevada and Utah) that got gold awards from Morningstar.”

That’s still incentive to use another better-ranked plan, Laughter said.

“You don’t have to use the Georgia plan because you live in Georgia,” she said. “I don’t use the Georgia one. I use Virginia’s 529 College Savings Plan. No, I don’t get a deduction on my taxes, but you’re not limited to schools or states if you use a different state plan. And I think the investment quality is more important than getting a state tax deduction.”

Regardless of which plan someone uses, having a 529 is a “good way to go for saving for school,” Laughter said.

“Most let you have tax-free earnings and tax-free withdrawals when you start paying for school (including the Georgia plan),” she said. “You can also change the beneficiary to anyone else, even yourself. Cousins, brothers, moms, dads ... anyone seeking college, any direct relative. If a grandparent had a 529 for a grandchild and — for whatever reason — they wanted to move it to another grandchild they can do that.”

For a complete listing of 529 plans, visit www.savingforcollege.com