Suitability and 529 Plans
When recommending 529 college savings plans, the MSRB believes it is important for the recommendation to match the customer’s investment objective. Also, the MSRB wants you to know that individuals who invest in 529 plans should do so because they reasonably expect to finance someone’s higher education. In other words, 529 college savings plans should not be used as piggy banks for other purposes.
While the person who opened and controls the account is considered the customer for purposes of G-19, the MSRB believes that information about the beneficiary is also important for a suitability analysis. For example, the representative should know the age of the beneficiary and the number of years until the funds will be needed. So in the context of 529 plans, information about the designated beneficiary should be considered part of the customer’s investment objective.
It is important to understand underlying investments within a 529 plan so that you can help a customer choose investment options that are in line with the customer’s goals. There are two basic types of 529 investment options: age-based plans and static-choice plans. Age-based plans automatically adjust assets towards less risky investments as the beneficiary approaches college age. This generally means that plans begin with a higher risk and higher reward portfolio (mostly stocks and some bonds) and then later shift toward a more conservative bond-and-cash or cash equivalent portfolio. In contrast, static-choice plans typically maintain the same allocation of investment classes over time. Both types of plans typically offer conservative, moderate, and aggressive asset allocations. Investors choosing a static-choice plan will often keep the same asset allocation through the plan’s duration.
General principles to remember about the underlying investments within a 529 plan:
- • Stocks are riskier and more volatile than bonds, but they offer highe