Employers increasingly understand the growing need to support family financial issues beyond the paycheck, including health care benefits, retirement savings and college savings. Most companies in the U.S. provide health care and retirement benefits, and a growing number are providing access to college savings plans.
Making college savings easy and systematic can become a key differentiator for organizations that are committed to their employees’ entire financial health. Offering a 529 college savings plan in the workplace connects the company to the employee’s family and helps foster loyalty and retention.
Employers do not need to incur any costs when offering a college savings plan beyond the typical administrative expenses associated with any benefits enrollment program. The 529s are funded by the employees directly; no changes are required on W-2 reporting, as the direct payroll deposits are made into a 529 plan with after-tax dollars. Some plans offer institutional class shares for employer-facilitated plans that might reduce fund fees for employees.
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“Employers do not need to incur any costs
when offering a 529 college savings plan
beyond typical enrollment expenses.”
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The College Funding Gap
The cost of a college education can be overwhelming, and college education inflation rates continue unabated. Consider these recent statistics from the College Board’s 2011 Trends in College Pricing Report:
At the average in-state public university, annual tuition increased by 8.3 percent to $8,244.
At a typical private university, living and studying costs rose 4.4 percent to $38,589.
- Public two-year college tuition jumped 8.7 percent on average to $2,963.
It's no wonder that the increasing gap between college tuition and available savings is a source of increasing financial stress. In response, HR benefits consulting firms are recommending that employers provide access to 529 plans funded through salary deferral contributions.
Benefits Education
As with any benefit program, educating employees about 529 plans is essential to ensuring that employees value and use this benefit properly. In addition to explaining the convenience of monthly payroll deductions, a benefits education program should highlight the tax and financial planning benefits of 529 investments.
Some plans (“advisor sold plans”) are sold by financial advisors that provide financial advice and guidance to the employee, while other plans (“directly sold plans”) might be more appropriate for employees who are more interested in making their own investment choices.
For example, the state of Colorado offers four college savings plans through CollegeInvest, a division of Colorado’s Department of Higher Education. Two plans—the Direct Portfolio College Savings Plan and the Stable value Plus College Savings Plan—are directly sold 529s through CollegeInvest. A third plan, the Smart Choice College Savings Plan, is directly sold through First Bank. The fourth plan is the Legg Mason Scholars Choice 529 Plan, which is available via financial advisors.
Tax Advantages
No matter the state program, distributions from 529 plans for qualified higher education expenses are exempt from federal income tax.
Other tax benefits vary from state to state and from plan to plan, as do performance and expenses. As an example, for Colorado residents contributions are deductible from Colorado state income tax in the year of the contribution, up to the contributor’s Colorado taxable income for that year. Investors who are not residents of Colorado might or might not qualify for meaningful state tax benefits depending on their state of residence. Some states have no local tax benefit, while some will extend the taxable benefit to investors from out of state.
A Commitment to Employees’ Financial Health
Parents want to be able to provide their children with more opportunities to achieve their dreams. Employers that offer access to a 529 college savings plan as part of a comprehensive benefits package help their employees reach their goals. Organizations that offer employer-facilitated 529 plans gain a competitive edge in attracting and retaining employees while contributing to the overall financial well-being of their employees.
John Kenney is head of Legg Mason’s Global Asset Allocation group, which offers a broad range of asset allocation products including the Legg Mason Scholars Choice 529 Plan.
An investor should consider the program’s investment objectives, risks, charges and expenses before investing. The program disclosure statement at www.scholars-choice.com, which contains more information, should be read carefully before investing. © 2012, Legg Mason.