UpFront | Published in August 2013

Derailing Retirement Savings?

529 plan assets reach an all-time high

By Judy Faust Hartnett | August 2013

Finding money to put away for retirement is a challenge for all, but studies show that parents who help to finance their children’s higher education needs may face an additional challenge in understanding savings priorities.

In light of the rising cost of college tuition, the increasing student loan debt and escalating interest rates for federal loans, parents have begun to take steps to avoid saddling their children with higher education debt. One way they are doing this is by investing more in 529 plans, also known as “qualified tuition plans”—tax-advantaged savings plans that can be used to pay for college or graduate school tuition.

According to Strategic Insight (SI)’s “529 Industry Analysis” for 2012 (see Figure 1, above right), 529 assets are currently estimated to be $180.3 billion as of this year’s first quarter, reflecting a 7.0% increase from assets of $168.5 billion in the fourth quarter of 2012 and a 14.0% increase from assets of $158.2 billion in the first quarter of that year.

These all-time-high numbers indicate that participants may be diverting investments from their retirement plans into 529 plans. According the SI report, plan participants have been borrowing from their retirement products to fund college costs: 401(k) loans are used 24% of the time and traditional or Roth individual retirement accounts (IRAs) 16% of the time.

However, this decision to provide for children instead of themselves could hurt parents in the long run. “Failing to help participants save for college expenses will limit and potentially derail your ability to help participants get retirement ready,” notes Paul Curley, director of College Savings Research for Strategic Insight.