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529 Plan Marketing Tactics May Hurt Investors

© Arman Rousta

The way fund managers have described themselves on television and print advertisements must be closely watched. Some state 529 Plans are described as "National Plans", with brokers and financial advisers fueling the 529 fire by referring unknowing clients to plans that may not be good for them due to higher fees and sales commissions. Some 529 plans offer state tax deductions, partial contribution matching, and other state-specific benefits. If you are not a resident of that state, then you may not qualify for any of the state perks. Yet, for marketing purposes, many residents of particular states do not hear about such details; instead, they are omitted from advertisements because fund managers have more to gain if they can sell their 529 plans nationwide.

So then the question arises - how truthful are the claims of the fund managers that sell 529 plans and the brokers that assist them? Can you make sound financial decisions based on the information you hear? How you answer these questions depends on how well-educated you are about the 529 plans. For the general public, this is not an easy task. Because of the financial motives involved, many of the professional, such as financial advisors, brokers, and accountants, who you trust and with whom work closely, are inclined to tell you about a 529 plan that pays dividends for them. Some of the best plans available are not sold through advisers at all, therefore do not receive much attention, hence are less widely distributed. As a client, you are entitled to sound advice, yet those two words are very difficult to define in a business world that focuses on customer acquisition above and beyond prudent and ethical financial advice.

Indeed, the marketing game of 529 Plans, while benefiting those savvy fund managers that know how to lure clients, hurts consumers. There is too much cloud between them and the information that they need to know. A case in point: A New York resident who recently put money into Putnam's "National 529 Plan" found out quite shockingly that she could have gotten a New York tax deduction had she invested in New York's 529 Plan, managed by TIAA-CREF. But what's worse is that she would be penalized if she were to switch over to the competitor's 529 Plan.

Unless she is a financially savvy person and knows the ins and outs of the trade, she would need to rely on the professional financial communities. But this is where it gets tricky. Knowing who to count on for sound advice is invaluable lest you get misdirected by the biased 529 sellers.

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