What are 529 College Savings Plans?
529 college savings plans are established by states under Internal Revenue Code (IRC) Section 529(b)(1)(A)(ii) as qualified tuition programs through which individuals may accumulate funds for certain qualified higher education expenses of beneficiaries. Individuals purchase interests in a trust or other financial arrangement established by the state or its instrumentality, with the collective assets invested according to the plan’s stated investment objectives.
Read about tax benefits of 529 plans.
States typically engage investment management firms, such as mutual fund companies, to manage the investment of assets. In response to market volatility, some states offer guaranteed or insured products. These products vary in their level of risk and investors should read the plan disclosure documents carefully before investing. In addition, most states engage municipal securities dealers to serve as primary distributors of their 529 college savings plans. If a municipal securities dealer acts as a primary distributor or offers to sell interests in 529 plans to investors, such dealer must follow MSRB rules.
Investors may open an account through an authorized investment firm (referred to as an advisor-sold plan) or directly with the 529 plan (a direct-sold plan), either through the 529 plans primary distributor or directly with state personnel. Fees and charges may be lower in a direct-sold plan, but an investor may not have access to the advice of an investment professional, as with an advisor-sold plan.
Read about purchasing a 529 plan and investments within a 529 plan.
Although these plans all share certain common elements required under IRC Section 529, many features may vary such as state tax law treatment, who may invest in a plan and the types of investments available, among many others.
Each 529 college savings plan typically provides information in a program disclosure document designed to assist investors in making a decision as to whether to invest in the plan and, if so, which investment options to select. This information also is designed to assist investors in understanding how the 529 college savings plan operates and the risks of investing in the plan. Additionally, virtually all plans provide information to the public through their websites.
Read about disclosures for 529 plans.
Exemption From Mutual Fund Laws
Although most 529 college savings plans have been modeled after mutual funds or funds of funds, they are not subject to regulation under the Investment Company Act. In particular, in structuring a 529 college savings plan, an issuer is not required to meet the basic requirements set forth in the Investment Company Act. The requirements from which a state is exempted include, among other things, registration with the Securities and Exchange Commission, preparation of a prospectus and statement of additional information, daily calculation of net asset value, and establishment of a board of directors that includes independent directors.
Municipal securities dealers that market 529 college savings plans are also exempt from the Investment Company Act, but they must fully comply with MSRB rules.
Pre-Paid Tuition Plans
Unlike 529 college savings plans, pre-paid tuition plans under IRC Section 529(b)(1)(A)(i), whether established by a state or educational institution, generally are not considered municipal securities.
More information about 529 college savings plans may be obtained from states with plans, the municipal securities dealers that market the plans and a number of other third parties including:
Helpful publications include: