Upload
ngonhan
View
213
Download
0
Embed Size (px)
Citation preview
529 Essentials Seminar 2016:Opening RemarksSeptember 12, 2016JW Marriott Grande Lakes, Florida
#529conference
Paul Curley, CFADirector of College Savings ResearchEditor of 529 DashStrategic [email protected]@PaulCurleyBC
Essentials Seminar AttendeesHave you attended the Essentials Seminar training day previously?
o No, this is my first time%o Yes, one time%o Yes, more than once%
Source: 529 Conference 2016 In-Event Survey
#529conference
Essentials Seminar Attendees
Source: 529 Conference 2016 In-Event Survey
#529conference
How long have you been working with 529 plans?o Less than a year...%o 1-3 years%o 3-5 years%o 5-10 years..%o More than 10 years..%
Essentials Seminar Topics
Source: Event Surveys and Feedback. Thank you.
#529conference
- The 529 Landscape- Federal Regulatory Framework- Federal & State Income Tax Benefits- Gift & Estate Tax Planning- Plan Governance & Administration Best Practices- Structuring & Evaluating the Investment Line-up- Lifecycle of Planning, Saving and Paying for College- Fundamentals of College Savings Plan Operations- Comparing College Savings Vehicles: How do 529s Stack Up?
Download the 529 Conference
App
The 529 LandscapeBy
Chris Stack, Esq.Managing Consultant, Savingforcollege.com
September 12, 2016
The 529 Landscape is diverse, changing and expanding!
AGENDA1. Background and Beginning of 529 Plans2. Types of plans and features3. Select Historical Milestones4. Where Are We Today?5. Are 529 Plans a Success?
Background & Beginning of 529 Plans1. High Inflation of the 1980s 2. Significant tuition increases at all colleges 3. MI Education Trust prepaid tuition agency enacted 19864. IRS to tax MET as a taxable entity (IRS letter 3/29/88) 5. Dispute/Litigation IRS wins case (8/3/92)MI appeals
6. 6th Circuit Court victory for Michigan Argued 8/6/93; Decided 11/8/94; Rehearing/Request for Rehearing EnBanc Denied 2/2/95 =MET is exempt as a state instrumentality; as an
extension of the State
Background & Beginning of 529 Plans7. 6th Circuit Court = MI, KY, OH, TN
8. Other states/programs left exposed to IRS challenges
9. FL outside 6th Circuit ; KYs plan not a prepaid plan
10. Senators Bob Graham (D-FL) & Mitch McConnell (R-KY) co-sponsor 529 of the IRC as SBJPA bill rider Pres. Clinton signs into law August 20, 1996
529 (b)(1): A qualified tuition program shall be exempt from taxation1 and means a program established and maintained by a State or agency or instrumentality thereof or by 1 or more eligible educational institutions under which a person may purchase tuition credits or certificates on behalf of a designated beneficiary which entitle the beneficiary to the waiver or payment of qualified higher education expenses of the beneficiary,
or
in the case of a program established and maintained by a State or agency or instrumentality thereof, may make contributions to an account which is established for the purpose of meeting the qualified higher education expenses of the designated beneficiary of the account2,
and
meets the other requirements of this section3.
1 - 529(a); 2-529(b)(1)(A); 3- 529(b)(1)(B); italics = 2001 EGTRRA
IRC529 creates/ clarifies 2 types of plans
Other Requirements Cash contributions/purchases only accepted
Separate accounting for each beneficiary Contributor may not directly or indirectly direct the investment, except 2x a year
Accounts cannot be pledged as security of a loan
Plan must impose safeguards against contributions in excess of what is needed for qualified expenses
What is NOT Required by IRC529? No time or age limitations
No limit on account growth
No income limitations
No account ownership change limitations
No limit on who can be Designated Beneficiary
No Designated Beneficiary change limitation
No limit on # of accounts 1 owner may have
4 types of Prepaid Plans: 1. State Contract Plans: state plans that allow you to purchase a contract
covering from 1 to 5 years of tuition either on a lump sum or installment basis. FL, IL, MD, MI, MS, NV, VA: open to new accounts WV, TX, KY, AL, SC: closed to new accounts
2. State Unit/Guaranteed Savings Plans: state plans that allow you to buy 'units' of tuition which may equate to credits or hours. PA & TX*: open to new accounts CO, OH, TN, WA & WI: closed to new accounts
3. Massachusetts U Plan*: not a 529 plan; but the plan invests in MA general obligation tax-free municipal bonds.
4. Private College 529 Plan*: > 270 private participating colleges and universities* - liability for honoring the value of the contract is with the institutions, not the program itself
Types of 529 Plans Today
4 types of Investment or Saving Plans: 1. Privately Managed -Directly Offered Investment Plans: offered directly to the consumer by a state or private entity with whom the state contracts most day-to-day operation responsibility in return for program and investment management fees based on assets under management. Primarily an investment company such as TIAA or a third party administrator such as Ascensus. Mostly low cost index mutual funds.2. Advisor-sold Investment Plans: distributed by manager through brokerage firms to clients mostly actively managed mutual funds and includes the advisors compensation in the products pricing such as a sales charge or commission.3. Bank CD Plan/Option Savings Plan: allows account owners to save in traditional FDIC-insured deposit accounts at participating banks or financial institutions and benefit from Section 529 tax advantages4. ETFs only: NV/State Street & AR/BlackRock/iShares favorite among RIAs
Types of 529 Plans Today
529 highlights of Federal legislative benefits Tax-free growth while within the program
Room & Board among such expenses
Contributions treated as completed gifts
Allows 5 years of tax-free gifting/funding at once
Tax-free distributions for qualified expenses
Tax-free rollovers with same DB 1x per 12 months
Tax-free distribution determination by taxpayer; not plan
Tax deduction/reduction of State taxable income for contributions 4 states (CO, NM, SC & VW) offer $ for $ deduction for year of investments into their plan Other states range from $1,000 total (aggregate/single) to $20,000 for joint filer to others with a
carry-forward (e.g., CT:$60K=$10K/6 yrs.) or unlimited # of years OH, VA, WI
5 states (AZ, KS, MO, MT, PA) offer tax parity, i.e., a deduction for the plan of your choice
Protection of accounts from claims by creditors or judgements Some states offer generous protection and some carve out child support or require time
period from account opening to be effective
Exclusion of account value when awarding state-funded financial aid
Other such as scholarship programs, match funding programs etc.
State Specific Benefits
Selected Milestones of 529 Savings/Investment Plans1998 -Fidelity first major firm to roll out investment plan (NH)
Introduces concept of program manager revenue sharing with states
1999 -Fidelity/NH announces plan will be marketed nationallyMarketing focus beyond in-state with no residency requirement unlike pre-paid plans
2000 -Alliance/RI & Putnam/OH roll out first advisor-sold plans
2000 -Total AUM $2.5B at year-end (vs. $6B in prepaid plans)
2002 -American Funds/VA rolls out CollegeAmerica Introduces single fund options; first advisor plan with no age-based options
Tax law amended making administration easier for managers
2002 - Total y/e AUM reaches $19B (vs. $8B in prepaid plans)*
68% of net sales through intermediaries vs. 32% through direct plans
2003 - NY selects Upromise as new program manager first major conversion ($1.9B; November 2003)
Its the states plan; an institutional mandate of retail accounts
Oregon replaces Strong as program manager; NV & WI follow suit
2004 - First advisor plan closes (NC) at year-end (HI & PA follow)
2005 - Ohio launches FDIC-insured option (following AZ & MT) & followed by > 12 other states
Today, there are 49 states (& DC) offering at least 1 plan
Where are we today? Today: 49 states (& DC & a college consortium) offer either/ both savings/prepaid plans for a total of over 100 plans/products
WY offers no plan; all other states except WA offer 1 or more investment plans/products (WA hoping to launch plan soon); NV offers 5 different 529 plans
9 states: FL, IA, LA, NC, OH, PA, TN, UT, VA manage most of their own investment plans
41 states & DC use private firms as program managers under contract terms ranging from 2 years to 35+ years
Today, there are 27 plans offering advisors loads +/or commissions
>30 states have changed/added investment program managers since their start
Where Are We Today? 48 states (not WA or WY) & DC offer a 529 investment plan today
8 such programs hold >50% of AUM as of 6-30-16; VA alone has >22%* The landscape continues to evolve:
Few State pre-paid tuition plans continue operations (FL, IL, MD, MI, MS, NV, VA)*Investment Plans fees reduction continue (AZ, CA, CT, DE, ID, MA, MO, NE, NH, NV others)RI converts $6B from AB, after 15 years, to Invesco & Ascensus
Fees continue to go lower -are they at/near the bottom?Outside managers total fees fall to 17 -NY; 15 bps -SC
* the MA prepaid plan is not a 529 plan.
Where Are We Today? 48
Where Are We Today?15 Largest 529 Investment Plans by Assets
Where are we today? Of top 15 plans, totaling $147.3B, $76.4B (51.9%) are direct to
consumer type plans & $70.9B (48.1%) are advisor-sold plans. Of top 15 plans, 4 are plans with in-state marketing focus/more
in-state aum (direct CA, MI, NY & OH: $20.8B) and 11 plans have more out-of-state focus & non-resident assets ($126.5B).
Some states offer very similar options but at very different costs .
Question: Is it necessary for every State to offer a plan?
Where are we today?Legislation: Since its enactment in 1996, 529 amendments have all
been positive.Plan Structure: Plans have lowered their fees with a few exceptions. Plans have improved offerings - with a few exceptions.
Legal Evolution of 529 Plans All Positive 1996: Section 529, Small Business Protection Act - established IRC 529 1997: Taxpayer Relief Act substantially enhanced 529 added room & board; made contributions a gift 1998: IRS releases proposed regulations (still not finalized) 2001: EGTRA granted Qualified Withdrawals tax free status through 2010 2001: IRS allows annual investment change to 1x per calendar year from none previously 2005: Bankruptcy Act provides protection of 529 assets in account 2 years or longer with certain DBs 2006: DOE changes financial aid treatment of 529 plans 2006: Pension Protection Act made tax-free Qualified Withdrawals 2008: Treasury issues 529 Advanced Notice of Proposed Rule Making to address potential transfer abuse 2009: IRS allows investment changes 2x that year to address financial crisis needs 2014: ABLE Act amends IRC 529 to allow 2x investment changes per calendar year 2015: PATH Act adding laptops, printers, software as Qualified Expenses & allowed for refunds redeposited
Legal Evolution of 529 Plans All PositivePending Legislation:
S 2869 Boost Saving for College Act a game changer? Provides for TAX-FREE rollover/conversion to a Roth IRA for the 529 account owner
or beneficiary after the account has been in existence 10+ years. Provides up to $1,000 employer match of 529 contributions by employee as non-
taxable income to such employee. Allows low- and middle-income families to claim a nonrefundable tax credit of up
to $1,000 ($2,000 if filing jointly) as a match to their 529 savings plan contributions. Rollover a 529 account to a 529-A account or ABLE account tax-free.
Legal Evolution of 529 Plans All PositivePending Legislation:
HR 3170 Student Debt Repayment Fairness Act Allows penalty-free distributions from qualified tuition programs to pay student
loan indebtedness
Where are we today/Where Are We Going?
Are 529 Plans a Success?How Do we Define Success?
States: Number of Accounts? (especially in-state)Program Managers: $AUM?Participants/Investors: Return on/of Investment?
Where are we today?Are 529 Plans a success?
2005: 7.2 million accounts, including prepaid plans to ... 2015: 12.7 million accounts, including prepaid plans
2005: $68B investment/savings; $12B prepaid aum to 2015: $231B investment/savings; $23B+ prepaid aum
2005: average 529 investment plan expense ratio > 1% vs. 2015: several plans available for an average expense of 0.16%
Where are we today?Are 529 Plans a success?o $1,250,000,000,000 Student debt outstanding vs.
$253,000,000,000 total 529 savings/investment/prepaid aumo Average 4 year public university 1 year cost of attendance: $26,500 vs.
Average 529 investment/savings account size of $17,949o Have been criticized as utilized more by the wealthy (see Obama 1/15 stmt)o 72% of Americans dont know what a 529 Plan is (Edward Jones 5/16 survey)
= Weve come far but have a long way to go
Thank You !
Questions?
Federal Regulatory FrameworkErnesto A. Lanza | Clark Hill [email protected] | (202) 572-8672
Federal regulatory frameworkIn this session, we will walk through high-level review of: Origins of regulatory framework & basic program structure Federal tax laws shaping key program operations
Tax benefits to investors & beneficiaries covered in next 2 sessions Federal securities laws governing certain aspects of
investment management & program marketing Will highlight differences in application to State program & private
sector partners
State programs operate within a unique legal framework States establish own rules of operation, subject to:
Federal tax law, which shapes structure must be followed to maintain federal tax benefits for owners & beneficiaries Internal Revenue Code 529 & IRS regulations
Federal securities law, which shapes investment advisory & marketing activities must be followed to avoid legal liabilities Securities Act, Securities Exchange Act, Investment
Advisers Act & SEC/MSRB regulations
State program evolution as driver of federal regulatory structure States invented & drove initial structure of programs,
including ground rules and State tax & other benefits State structural decisions triggered federal tax &
securities law issues Strong public policy goals of programs facilitated
adaptive changes in federal tax & securities laws
Savings plan vs. prepaid plan 529 plans include prepaid tuition plans & college
savings plans Prepaid tuition plan purchase future college tuition
credits/units at current price, avoiding tuition inflation College savings plan invest funds to achieve potential
investment growth to make future tuition & related payments
Savings plan vs. prepaid plan The IRS treats them much the same
tuition cost increases avoided through prepaid tuition plan = investment earnings realized in college savings plan
Federal securities regulators treat them quite differently college savings plan investments = securities, prepaid tuition
plan units = contracts securitiesReview of regulatory framework that follows focuses on college savings plans
Savings plan structure Understanding regulatory framework requires
understanding basic college savings plan structure: State program created to receive contributions, to disburse
funds when withdrawn & to invest funds pending withdrawal account owner opens account with program, designates
account beneficiary, contributes cash to account & provides investment direction among options offered by program
beneficiary has college tuition & related expenses paid from funds withdrawn from program account
Savings plan structure basic visualAccount Owner
State Program
College
Beneficiary
$ contribution $
$ withdrawal $
education
Investment A
Investment B
Investment C
Investment D
Account
Plan structure & federal tax law Core federal tax requirements for savings plan:
qualified tuition program State program established & maintained by a State or its agency or instrumentality
account owner may contribute cash to account for purpose of qualified higher education expenses of account beneficiary such as tuition, fees, books, supplies, required equipment,
computer equipment , software, room and board State not required to police use of withdrawals
Plan structure & federal tax law Core federal tax requirements for savings plan:
investments owner limited to original investment direction and no more than 2 changes per year, subject to rollover rules each beneficiary also permitted 1 rollover per year from one
529 program to another however, not considered a rollover if beneficiary changed to
member of family of original beneficiary
Plan structure & federal tax law Core federal tax requirements for savings plan:
separate accounting for each beneficiary, although funds from multiple account owners for multiple beneficiaries may be commingled for investment purposes
prohibits contributions in excess of beneficiarys qualified higher education expenses, typical through a cap
prohibits use of account as security for loans requires annual Form 1099-Q reporting of gross distributions &
earnings portion of distributions to IRS and to beneficiaries
Plan structure & federal securities law Depending on plan structure, federal securities law may
apply to many operational aspects of plan are securities involved? who is taking action with respect to the securities? what type of activities are involved?
While many securities laws do not apply to savings plans, no savings plan is completely unaffected
Savings plan structure basic visualAccount Owner
State Program
College
Beneficiary
$ contribution $
$ withdrawal $
education
Investment A
Investment B
Investment C
Investment D
Account
Savings plan structure multi-userAccount Owner 1
State Program
College 1
Beneficiary 1
$ contribution $
$ withdrawal $
education
Investment A
Investment B
Investment C
Investment D
Account 1Account Owner 2
Account 2$ contribution $
College 2
Beneficiary 2
$ withdrawal $
education
Savings plan structure rule paradigmAccount Owner 1
State Program
College 1
Beneficiary 1
$ contribution $
$ withdrawal $
education
Investment A
Investment B
Investment C
Investment D
Account 1Account Owner 2
Account 2$ contribution $
College 2
Beneficiary 2
$ withdrawal $
education
Investment Fund {
Savings plan structure rule paradigmAccount Owner 1
State Program
College 1
Beneficiary 1
$ contribution $
$ withdrawal $
education
Investment A
Investment B
Investment C
Investment D
Account 1Account Owner 2
Account 2$ contribution $
College 2
Beneficiary 2
$ withdrawal $
education
Investment Fund {
Buying shares of Investment Fund
Selling shares of Investment Fund
Plan structure & federal securities law Collective investment fund typically known as investment
company or mutual fund outside of 529 plan context investing in mutual fund involves buying & selling shares of fund
fund regulated by Securities & Investment Company Acts investment adviser manages funds underlying investments
adviser regulated by Investment Advisers Act broker-dealer intermediates between buyer & seller of shares
broker regulated by Securities Exchange Act
Plan structure & federal securities law Special securities law treatment for State governments
State investment fund exempt from Investment Company Act underlying investments still regulated
State employee investment advice exempt from Investment Advisers Act private sector adviser still regulated
State employee sales exempt from Securities Exchange Act private sector broker-dealer still regulated
Plan structure & federal securities law Special securities law treatment for State governments
State employee structuring advice exempt from regulation private sector structuring advice regulated unless exempted
Notwithstanding States broad exemptions, States remain subject to anti-fraud prohibitions in Securities Act
Savings plan structure rule paradigmAccount Owner 1
State Program
College 1
Beneficiary 1
$ contribution $
$ withdrawal $
education
Investment A
Investment B
Investment C
Investment D
Account 1Account Owner 2
Account 2$ contribution $
College 2
Beneficiary 2
$ withdrawal $
education
Investment Fund {
Broker-Dealer or State personnel
Broker-Dealer or State Personnel
Investment Adviser or State Personnel
Plan structure advisor
Municipal fund securities Shares in 529 plan known as municipal fund securities
distinct class of municipal securities other municipal securities are tax-exempt municipal bonds
broker sales of municipal fund securities subject to MSRB broker-dealer rules
advice on investments subject to SEC investment adviser rules advice on plan structuring may be subject to MSRB municipal
advisor rules
Municipal advisor regulation municipal advisor = provides advice on issuance of
municipal securities, including advice on structure, timing, terms & other similar matters does not require intent to be municipal advisor, contract to serve
in role, or payment for municipal advisory services professionals with other roles with program can become
municipal advisor if provide advice exemptions exist but are narrow in many cases
Municipal advisor regulation municipal advisor exemptions
underwriting exception limited to broker-dealer acting as primary distributor only when engaged in narrowly defined set of underwriting activities
investment adviser exception limited to SEC-registered investment advisers only when engaged in providing investment advice does not exempt advice on whether or how to issue or on
structure, timing and terms of issuance
Municipal advisor regulation municipal advisor must:
register with the SEC & MSRB qualify its professionals through MSRB qualification exam take actions consistent with fiduciary duty comply with MSRB rules on:
recordkeeping, fair practice, gifts, pay-to-play, duties of municipal advisors, and supervision
submit to SEC compliance examinations
Broker-dealer regulation broker-dealers can serve in role of primary distributor for
program or as part of financial adviser distribution chain primary distributor viewed as underwriter of municipal fund
securities subject to: SEC Rule 15c2-12 on receiving & reviewing State programs
plan disclosure document MSRB rules on submitting plan disclosure document and
periodic program data to MSRB
Broker-dealer regulation broker-dealers can serve in role of primary distributor for
program or as part of financial adviser distribution chain any broker-dealer selling to customer must:
register with the SEC, MSRB & FINRA qualify its professionals through MSRB qualification exam,
including municipal fund security principal qualification comply with full array of MSRB broker-dealer rules submit to SEC & FINRA compliance examinations
Broker-dealer regulation broker-dealers can serve in role of primary distributor for
program or as part of financial adviser distribution chain also must comply with specific municipal fund securities rules:
time-of-trade disclosures on tax benefits & out-of-state investments
mutual fund-like advertising rules physical delivery of plan disclosure documents to customers periodic transaction confirmations
Securities law impact on State program Most direct effect of securities laws on State programs is
felt in connection with plan disclosure document essentially no affirmative content requirements for plan disclosure
document, although anti-fraud prohibitions apply can be liable for untrue statement of material fact or omission
of material fact necessary to make statements made, in light of circumstances under which made, not misleading
anti-fraud prohibition applies even if State does not use broker-dealers to market program
Securities law impact on State program If State uses primary distributor, then need for broker-
dealer compliance with SEC & MSRB rules influences range of choices for State actions and structures
Applicability of securities laws to some programs creates pressure to minimize divergence in practices between such programs and wholly exempt programs
Federal Regulatory FrameworkErnesto A. Lanza | Clark Hill [email protected] | (202) 572-8672
Federal & State Income Tax Benefits
Presented by: James W. C. Canup, PartnerHirschler Fleischer
69
529 BASICS
Qualified Tuition Program means a program established and maintained by a state or agency or instrumentality, or by one or more eligible educational
institutions.
70
529 BASICSUnder which a person may purchase tuition credits or certificates on behalf of a
designated beneficiary for the waiver or payment of qualified higher education expenses, or
may make contributions to an account established for the purpose of meeting the qualified higher education expenses of the designated beneficiary.
71
Additional Requirements
Purchases and contributions may only be made in cash; Must provide separate accounting for each designated
beneficiary; A contributor or designated beneficiary may not,
directly or indirectly, direct the investment of any contributions to the program or any earnings thereon more than two (2) times in any calendar year.
72
Additional Requirements (cont.) Must not allow any interest in the program to be used as security
for a loan; and Provide adequate safeguards to prevent contributions on behalf of
a designated beneficiary in excess of those necessary to provide for the qualified higher education expenses of the beneficiary.
Safe Harbor: Contributions may not exceed the amount necessary to pay tuition, fees, and room and board for five years of undergraduate enrollment at the highest cost institution allowed by a program.
73
DEFINITIONSDesignated Beneficiary the individual designated at the commencement of the qualified tuition program as the beneficiary of amounts paid to the program (includes the individual who is the new beneficiary when there is a change of beneficiary).
74
DefinitionsMember of the family means with respect to a designated beneficiary:
child or descendant brother, sister, stepbrother or stepsister (and half and adopted) father, mother, or ancestor stepfather or stepmother niece or nephew aunt or uncle son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law
or sister-in-law a spouse or the spouse of any of the foregoing first cousin
75
DefinitionsQualified Higher Education Expenses: Tuition, Fees, Books, Supplies, and Equipment
required for enrollment or attendance of the designated beneficiary at an eligible educational institution
Special needs services for a special needs beneficiary Computers
76
DefinitionsQualified Higher Education Expenses (cont.)
Room and Board if the designated beneficiary is at least a half time student
Not to exceed - the allowance for room and board included in cost of attendance by the
eligible educational institution, or the actual invoice charged by the eligible educational institution, if greater.
77
Definitions
Eligible Educational Institution means
an institution described in the Higher Education Act, and
that is eligible to participate in programs under title IV of that Act., i.e., those institutions that are eligible to participate in federal financial aid programs
78
Income Tax Treatment
No amount is includible in gross income if the distribution is used for qualified higher education expenses. In essence, income recognition is deferred while
funds are in the 529 account, and No tax on the earnings when used for QHEE
79
10% Penalty TaxThe earnings portion of a distribution that is not used for qualified higher education expenses is not only includible in income but is also subject to an additional 10% penalty tax.
Income and penalty tax are reportable and paid by the distributee; e.g., either the account owner or beneficiary.
80
10% Penalty Tax Exceptions Made to the estate of the beneficiary Due to the designated beneficiary being disabled Made on account of a scholarship to the extent of the
scholarship Made on account of attendance at a U.S. service
academy to the extent of the cost of attendance at such academy
Taxable distribution used to claim American Opportunity and Lifetime Learning Credits
81
RolloversA rollover within 60 days of a distribution to another program for the benefit of the same designated beneficiary is not a taxable event if the rollover occurs more than 12 months after the date of any previous rollover.Rollovers can be full or partial rollovers.Rollovers can be trustee to trustee or accomplished in multi-steps so long as completed within 60 days (caution).
82
Rollovers
Transfers to a designated beneficiary who is member of the family of the previous designated beneficiary are not includible in income.
Not subject to the 12-month limitation.83
Recontribution of RefundsA beneficiary who receives a refund of qualified higher education expenses from an eligible educational institution:
does not have a taxable event to the extent the refund is recontributed to a qualified tuition program for that
beneficiary if the recontribution is made within 60 days of the refund and it
does not exceed the amount of the refund.Transition Rule for 2015 refunds expired February 16, 2016.
84
FUNDING A 529 ACCOUNT Contributions, either lump-sum or through recurring
contributions Liquidation of non-529 assets or accounts Tax-free liquidation of a Coverdell ESA
Must have the same beneficiary as the ESA beneficiary Tax-free redemption of certain Series EE and I bonds issues
after 1989 Income phase-outs apply Bond owner, spouse or dependent must be the beneficiary
85
No Income Tax Consequences From Rollover Change in account owner Change in beneficiary so long as the new
beneficiary is a member of the family of the old beneficiary
86
DISTRIBUTIONS Distributions are typically made to:
The account owner The beneficiary The eligible educational institution
Distributions to the last two are reported by the beneficiary, if taxable
Distributions are reported on IRS form 1099-Q87
DISTRIBUTIONS (Contd) Only the earnings portion of a distribution is
included in income if the distribution is a non-qualified distribution
Recipient of the 1099-Q is responsible for any tax reporting
If the distribution equals or is less than QHEE for that year, no income tax
88
DISTRIBUTIONS (Contd) If the distribution exceeds QHEE for that year
then a portion or all of the earnings will be taxable, plus 10% penalty tax will apply
Important to match expenses and withdrawals in the same tax year
89
Coordinating Tax Benefits No Double Dipping cant claim exclusion for
QHEE from a 529 plan account withdrawal while also claiming the American Opportunity or Lifetime Learning credits
If eligible for the credits, use non-529 funds to pay for expenses to qualify for the credits and 529 funds to pay all other qualified expenses
90
State Tax Considerations
Most states conform to federal tax: Earnings grow free of state income tax Qualified withdrawals are not taxed Non-qualified withdrawals subject to state tax Some states exempt scholarship, death, disability
and other withdrawals
91
State Tax Deduction or Credit There is no federal income tax deduction for
contributions to a 529 plan However, some states permit a state income tax
deduction or credit against state income tax for contributions to a 529 plan, typically only for contributions to that states plan
92
State Tax Deduction or Credit Most states limit the amount of the deduction or credit Some states permit a carry forward of any unused
deduction or credit Some states permit any contributor to claim the state tax
deduction or credit, not just the account owner Caution Be aware of recapture of any state tax
deduction or credit when making a rollover to an out-of-state plan or a non-qualified withdrawal
93
Guidance
Section 529 of the Code Proposed Regulations issued in 1998 IRS Notice 2001-55 and Notice 2001-81 Private Letter Rulings IRS Publication 970 IRS Form 1099-Q
94
Questions?
James W. C. CanupHirschler Fleischer, P.C.2100 East Cary StreetRichmond, VA 23223
T (804) 771-9518F (804) 644-0957
Thank You!
Gift and Estate Tax PlanningPresented by: James W.C. Canup
(804) 771.9518
Transfer Taxes - Background Taxes imposed on transfers of wealth other than to spouse
or charities Estate tax Gift tax Generation-skipping tax
Annual exclusion for qualified gifts: $14,000 per donor per donee
Lifetime exemption: $5.45 million ($10.9 million for married couple)
General Rule for Estate Tax
Interests in a 529 plan are not included in gross estate of any individual
Distributions made on account of the death of a beneficiary are includible in the gross estate
Unique benefit: Donor retains control
Estate Tax (con't.)
Exceptions: 5-year election throwback Self as beneficiary
Estate Tax (con't.)
In the case of a donor who makes an election totreat a contribution as being made over five years, if the donor diesbefore the close of the 5-year period any portion of the contributionattributable to years after the year of death are includible in the donorsgross estate.
No Basis Step-up
Earnings in 529 plan are not subject to step-up Not an issue if 529 earnings eventually come out
tax-free But if post-death distributions are non-qualified (i.e.
taxable), then step-up benefit is lost
General Rule for Gift Tax
Any contribution to a qualified tuition program on behalf of a designated beneficiary is treated as a completed gift to the beneficiary
IRS may seek to change treatment of contributions by non-owners Qualifies for $14K gift-tax annual exclusion
Remember to reduce allowance by other non-529 gifts 5-Year election to spread up to $70K in upfront contributions
Contributions exceeding annual exclusion are applied to $5.45 million lifetime exemption
Gift Tax (cont.)
A distribution from a qualified tuition program is not treatedas a taxable gift
unless the new beneficiary is assigned to a lowergeneration than the old beneficiary or is not a member ofthe family of the old beneficiary.
Gift Tax (cont.)
A donor can make an election to treat a contribution to a qualified tuition program that is in excess of the annual gift tax exclusion as being made ratably over a 5-year period beginning with the calendar year in
which the contribution is made.
Married Couples Combined annual exclusion: $28K
Spouses may consent to split their gifts (Form 709) Combined 5-Year election: $140K Combined lifetime exemption: $10.9 million
New portability provisions But 529 ownership is still important in event of separation or
divorce
General Rule for Generationskipping Transfer Tax
Contributions for a beneficiary more than one
generation below the donor are generation-
skipping transfers
5-year election applies here
Comparison of Gifting Vehicles 529 Plan UTMA Irrev. Trust Crummey Trust
Annual exclusion? Yes Yes No Yes
5-yr election? Yes No No No
Discounts? No No Maybe Maybe
Set-up cost None/low None/low Higher Higher
Income taxes None if qualified use
Possible kiddie tax
Compressed rates
Compressed rates
Revocable? Yes No No No
Control Retained Limited Limited Limited
What About 2503(e) Instead?
Direct payment of tuition is not a gift
2503(e) limited to tuition paid directly to an educational organization
Can still decide to do 2503(e) when 529 account has been set up
529 distributions will still be qualified if used for other QHEE other than tuition
Delayed Gifting Name yourself the beneficiary of 529 account
No gift with contributions Change beneficiary in later year
Gift occurs in year beneficiary is changed to lower-generation family member
Qualified for that years annual exclusion
5-year Election Applies to contributions totaling $14,001 to $70,000 in a
year ratably over five years
Elect on Form 709 Separately for spouses splitting gifts
Throwback for donor dying in year 1 through 4 Throwback does not include earnings
Using 5-Year Election
No partial election No spread on excess over $70,000 Joe Hurleys Year-End Power Funding
Wait until January to make the 5-year amount ($70K) Contribute $14,000 before end of the prior year Result is $84K into 529 by January of next year
Multiple 5-Year Elections Year 1 Year 2 Year 3 Total
Contribution $30,000 $25,000 $15,000 $70,000
Year 1 gift 6,000 6,000
Year 2 gift 6,000 5,000 11,000
Year 3 gift 6,000 5,000 3,000 14,000
Year 4 gift 6,000 5,000 3,000 14,000
Year 5 gift 6,000 5,000
Year 6 gift 5,000 3,000 8,000
Year 7 gift 3,000 3,000
3,000 14,000
Beneficiary Changes
Same generation = no gift Drop down generation = deemed gift
Former beneficiary to new beneficiary Five-year election available
Drop down 2 generations = GST In 2008 IRS proposed that gift be from account owner, not
former beneficiary
Successor Owner
Named successor assumes all rights Consider naming a trust
Ensures that wishes are carried out Failure to name consenting successor
Default to program rules or state law E.g. beneficiary becomes successor, if not a minor
Changing 529 Account Owner
Not all 529s permit a change No gift, estate or income tax impact, if not abusive Likely to be deemed abusive if change is followed by a
NON-qualified withdrawal
Should Grandparent Be the 529 Owner?
Alternative: Make a third party contribution to another persons (e.g., parent) 529 account (if permitted by the Plan)
Currently no difference in tax treatment But IRS proposal (2008) would have imposed tax on 100% of
any NQ distribution received by account owner1
1. Advance Notice of Proposed Rulemaking, 73 Fed. Reg. 3441 (Jan. 18, 2008).
Grandparent Considerations
1. Control and decision making2. Right to revoke3. Financial aid treatment4. Medicaid inclusion5. Creditors and divorce6. Coordinating withdrawals
Placing 529 Within a Trust Tax savings
Compressed tax brackets in trusts
Continuing 529 account management Donors death, disability or incompetence
Attorney and accountant involvement Prudent investor rules Fiduciary income tax rules GST tax issues
Cautions: financial aid, state income tax, penalty on funds withdrawn to pay trustee fees
10% Penalty Tax Exceptions
Made to the estate of the beneficiary
James W.C. Canup Hirschler Fleischer, PC
2100 E. Cary StreetRichmond, VA 23219-4058
T (804) 771.9518 F (804) 644.0957 [email protected]
September 12, 2016
Presented By
Andrea Feirstein, Managing Director, AKF Consulting Group
2
Todays Discussion Administration and Governance Disclosure
Advertising
Social Media
Questions and Answers
Appendix
3
Section 1.
Administration and Governance
Administration of 529 Plans
States, agencies or instrumentalities establish and maintain 529 plans
State legislation authorizes each States 529 plan
Models vary by the organization responsible for maintaining each plan:
4
Governance Management*
Education Authorities or Departments
Independent Authorities
Treasurers as Sole Trustee
Treasurer-run Boards
Third-party Managed
State Managed
12 13 10 14 84 7
*College Savings Plans only
Governance of 529 Plans
Boards and Trustees act as fiduciaries:
Exercise discretion or control over audits, investments and policies
related to account matters
Fundamentally, fiduciary duty is based upon:
Common law
State statutes
Internal Revenue Service overlay
By analogy, ERISA and 40 Act may also provide guidance
5
Common Law Fiduciary Duties Care
Act in good faith, in the best interest of the entity
Standard: ordinarily prudent person acting under similar circumstances
Loyalty
Put entitys interests ahead of personal interests
Act solely for the benefit of participants and beneficiaries
Obedience
Follow governing documents and the entitys mission
Comply with the law
Seek professional assistance where necessary
6
Internal Revenue Service Expectations
Exercise due diligence
Have accountability for actions
Meet standards for transparency and disclosure
Establish financial controls
Act independently
7
Federal Guidance on Fiduciaries ERISA:
Fiduciary status is based on the functions performed for the plan, not
just a persons title.
Fiduciaries are held to a prudent expert standard
Includes Trustee, investment advisers, municipal advisors and
any individuals exercising discretion in plan administration
Excludes attorneys, accountants and actuaries
40 Act Examples of Duties of Investment Company Directors:
Approve time of NAV calculations and procedures for valuation of
securities
Approve trading practices and procedures
Approve investment objectives and policies
Monitor credit quality and valuation of funds
8
9
CSPN on Governance and Plan Maintenance
Adopted in May 2010 in response to SEC and Morningstar concerns
about 529 plan oversight by State Administrators
Intended for State Administrators, not regulated entities
Guidance as adopted acknowledges that State structures all differ
Intent is to provide a framework for operating standards that:
Complement each plans enabling legislation
Provide transparency of performance
Facilitate oversight and monitoring
10
CSPN Guidance for Governance, contd
Matters State Administrators should consider in the operation of 529
plans
Structure and procedures should be appropriate to the size of the
Administrator
Governance should assure adequate oversight of operations
Procedures should assure compliance with legal and regulatory
requirements and oversee accounting and financial reporting
Structure should provide investment oversight
Demonstrating Good Governance
11
Selection of Program and Investment Managers
Open and fair solicitations
Selections should reflect weighted criteria that bidders understand
If sole source procurement, basis for closed process should be clear
Establishment of Performance Benchmarks
Administration and operations
Marketing costs and results
Investment policies and performance targets
Demonstrating Good Governance, contd
12
Investment Policy Statements
Establish roles, responsibilities and processes for fund selection and
investment option design
Detail monitoring procedures
Ramifications for underperformance should be clear
On-going Reviews
Monthly investment results from Investment Manager
Quarterly reports from Program Manager and Investment Manager
Independent quarterly review by an investment consultant or independent
advisor
13
Section 2.
Disclosure
14
Disclosure Overriding Fundamental
Content is always subject to anti-fraud prohibitions of securities laws
It is unlawful to make any untrue statement of a material fact or to
omit to state a material fact necessary in order to make the
statements made, in light of the circumstances under which they
were made, not misleading
Interpretation: You cannot lie about a material fact and you cant fail
to state a material fact IF that material fact would make the statement
not misleading In other words, if that material fact would have
caused the investor not to be misled
When is a fact material? Think like an investor.
15
Disclosure Best Practices No Set Standards Per Se
CSPN Guidelines are voluntary
Documents must be provided to investors, although they can opt for
electronic delivery of supplements and other communications
Access DOES NOT equal delivery (yet)
Direct-sold and State-managed 529 Plans
Determine extent to which applicable Rules and regulations provide
guidance
MSRB Rules apply to underwriters and primary distributors
Best practice would suggest submission of disclosure documents to
EMMA, along with 15c2-12 updates
16
MSRB on Disclosure
G-17 Content Requirements
Notice 2006-07 reiterates anti-fraud prohibition and the duty to deal
fairly
Out-of-state disclosure obligation
Home state tax treatment
State benefits are one of appropriately weighted factors
Contact home state or own advisors
Disclosure must appear in the document in a manner that is
reasonably likely to be noted by the investor
Dealers are responsible for determining sufficiency of information
provided
17
MSRB on Disclosure, contd
G-19 Suitability Requirements (Notices 2006-07 and 2009-42)
Applies to advisor plans
Recommendation is suitable based upon information available from
the issuer and the facts disclosed by or otherwise known about the
customer
Financial status, tax status and financial objectives
Information about the beneficiary
G-32 Delivery Requirements
Primary dealers must deliver offering documents to customers by
settlement and to EMMA within one business day of receipt
Access-equals-delivery does not apply to 529 offering documents
18
CSPN Disclosure Principles
2004 response to SEC and Congressional concerns about uniformity and
consistency of 529 disclosure
Adopted in 2004 and supplemented:
July 2005 to address SEC indications of concern (3B)
December 2008 to include anti-abuse tax avoidance language (3L)
December 2009 to encourage periodic reassessment of investments
(3H) and consistency of format (4)
May 2011 to establish performance reporting standards (3G)
DP6 under consideration ABLE-related matters
CSPN Disclosure Principles, contd Frequency of Updates (Section 2)
Summary of Key Features (Section 3B)
Prominent Statements (Section 3C)
Federal and State Tax Considerations (Sections 3D and 3E)
Fees and Expenses (Section 3F)
Performance (Section 3G)
Investment Options and Risks (Section 3H)
Principal Risk Factors of Plan (Section 3I)
Material Terms of Governance (Section 3J)
Contact Information (Section 3K)
Tax Advice (Section 3L)
Consistent Format (Section 4)
Exhibits A to C: Fee Charts and Performance Charts
19
20
CSPN Disclosure Principles Detailed
Frequency of Updates (Section 2)
Annually for at least performance
As needed for material changes
Note interplay with Rule 15c2-12
Summary of Key Features (Section 3B)
Investment options
Federal and State tax benefits
Participation limits, if any
Risk factors
Locator table with topics and pages
21
CSPN Disclosure Principles, contd Prominent Statements (Section 3C)
Any guarantees or lack of guarantees by State entities or otherwise
State tax treatment available only to State residents
Bold statement that other states may offer benefits to their taxpayers
that are not available with this plan
Consider tax or other benefits before making investment decision
Other 529 plans offered by this State issuer or another State entity
Those plans are not described in this material
There may be different investment options, benefits and fees
address the availability of Offering Materials describing such other
Plans.
22
CSPN Disclosure Principles, contd
Federal Tax Considerations (Section 3D)
Describe tax matters relevant to savings plans
Contributions and investment gains
Qualified and non-qualified distributions
Estate, gift and generation skipping transfer taxes
Material expiration dates, if any
State Tax Considerations (Section 3E)
Describe tax matters relevant to savings plans
Contributions and investment gains
Qualified and non-qualified distributions
Different tax treatment of residents and non-residents
23
CSPN Disclosure Principles, contd
Fees and Expenses (Section 3F)
Clear and concise description of initial and on-going fees
Who receives the fees and whether they are subject to change
How fees are determined (assets or fixed)
Specific fee tables are provided
Performance (Section 3G)
Conforming to requirements applicable to underlying investments
1-, 5- and 10-year results (or for life if shorter) net of all applicable fees
Past performance is not necessarily indicative of future results
Specific performance tables are provided
Increasingly important in light of MSRB Rule G-45
24
CSPN Disclosure Principles, contd Investment Options and Risks (Section 3H)
Discussion of associated risks, including loss of principal
State issuers right to change options or managers
A statement that account owners should periodically assess their
investment choices
and if appropriate, adjust their investment choices with their time
horizon, risk tolerance and investment objectives in mind.
Principal Risk Factors of Plan (Section 3I)
Investment losses
Federal or state tax law changes
Changes in fees
Adverse effect on financial aid or other benefit eligibility
25
CSPN Disclosure Principles, contd
Material Terms of Governance (Section 3J)
State issuer and relationship to the State
Identify trustee and custodian, if applicable
Whether any state fees will be used for non-Savings Plan purposes
Contact Information (Section 3K)
Include web addresses
26
CSPN Disclosure Principles, contd
Anti-Abuse and Tax Advice (Section 3L)
In a prominent location, a statement to the effect that programs are only
to be used for qualified higher education expenses
Not to be used to evade federal or state taxes or tax penalties
Taxpayers should seek tax advice from an independent tax advisor
are intended to be used only to save for qualified higher education
expenses. These Programs are not intended to be used, nor should
they be used, by any taxpayer for the purpose of evading federal or
state taxes or tax penalties. Taxpayers may wish to seek tax advice
from an independent tax advisor based on their own particular
circumstances.
27
CSPN Disclosure Principles, contd
Consistent Format (Section 4)
Distribution on-line, hard copy, or through other electronic means
If information is distributed in multiple formats, all materials must be
consistent at all times
Message: update everything at the same time!
Exhibit A Fee Charts
Exhibit B Performance Charts for Direct Plans
Exhibit C Performance Charts for Advisor Plans
28
Section 3.
Advertising
29
Advertising Best Practices Almost without exception, basic disclosures should be considered, e.g.:
Consider investment objectives, risks, charges and expenses, before
investing
Read the offering document
Unless an advertisements reach can absolutely be limited to an in-state
audience, home state language should be considered, e.g.:
Investors should consider whether their or the beneficiarys state
offers particular benefits
Performance information always requires a not-a predictor-of-future-
results clause
30
Advertising Best Practices, contd If guaranteed products are included, the limits or extent of the guarantees
must be clear, e.g.:
FDIC guarantees a bank savings option but no other options are
guaranteed
Disclosure type face must be as prominent as the text of the advertisement
In media advertisements, disclosure should be given the same emphasis as
that used in the advertisement, e.g.:
If the advertisement delivers the message visually, then the disclosure
language can be superimposed
If the message is delivered orally, then the disclosure needs to be heard
as well
31
MSRB Rule G-21: Product Advertisements
Concerns one or more specific securities or issues of securities or the
issuers or features of municipal securities:
The State X Savings Plan a tax advantaged way to save
Basic disclosures:
Consider investment objectives, risks, charges and expenses before
investing
More information is available in offering document
If the advertisement identifies a source from which to obtain the
offering document, and the dealer publishing the ad is the
underwriter, then the dealer must be identified
Offering document should be read carefully
32
MSRB Rule G-21: Identified Products
Refers by name to any municipal fund security, the issuer or the state or
governmental entity that sponsors the securities
The State X Plan, administered by State X Board includes the
Age-Based Portfolio
Additional disclosures:
Source from which to obtain an offering document
Investor should consider whether his or beneficiarys home state
plan offers any state tax or other benefits
This is not required IF advertisement is likely to be seen only in-
state
No guarantees (re money market options) or guarantees (FDIC-
insured options), as applicable
33
MSRB Rule G-21: Performance and Professional
Performance Information - Additional Disclosures:
Past performance does not guarantee future results
Investment return and the value of the investment will fluctuate so
that shares may be worth less at redemption than the original cost
Toll-free number for current total return information
Sales load information
Professional Advertisements No Requirements
Refers to broad categories of securities for which the dealer provides
services
Contact BD XYZ, your complete college savings advisor
If no references to specific 529 securities, then not subject to
required disclosures
34
MSRB Rule G-21: Disclosure Format
Print Advertisements
Type face must be same size as but a different style from and as
prominent as the disclosures type face
Must be in close proximity to disclosures if performance-related
Sales load information related to performance must be in a
prominent text box containing only that Information
Electronic Advertisements
Statements must draw investors attention to them
Disclosures must be given equal emphasis to that used in the
advertisement (visual versus oral)
35
G-21 Exceptions
Generic Advertisements (State X Plan, logo and dealer)
No references to specific investment options or portfolios
Identifies the dealer sponsoring the ad
Provides explanatory information about 529s
If the dealer is the underwriter, it must be disclosed
Blind Advertisements (State X Plan and logo)
Does not identify the dealer or any affiliate of the dealer
Includes the issuers name
Contact information for the issuer or its agent but if the agent is the
underwriter, then no orders can be initiated by the agent when the
customer calls
36
G-21 Exceptions, contd
Blind Advertisements, contd
Logo or graphic design of the municipal fund security as long as it
does not identify the dealer
Service mark or trademark of the issuers general objectives that
does not create a call to invest in the municipal fund securities
Form Letters to Existing Customers
Form letters distributed solely to the dealers existing customers to
whom the dealer has already sent an offering document
37
G-21 Interpretation, June 2007
Time-Limited Broadcasts
Context is important in determining if information is effectively
conveyed
Disclosures should be provided in a manner that appropriately
balances the message and the disclosure
Source and contact information can be visual while other disclosure
is oral
Blind Advertisements
If the dealer is the contact source, no orders can be initiated by the
dealer need a distinct barrier
Dealer cannot be identified in the ad phone or website must be
generic reference
FINRA on Advertising Content Standards:
Communications must be fair and balanced
Advertisement must provide a basis for evaluating the facts regarding
any security or service
Advertisements must not omit material information
False, exaggerated, unwarranted, promissory or misleading
statements are prohibited
Content is viewed for clarity and context
Involvement in Enforcement:
FINRA enforces MSRB Rule G-21
Also enforces applicable SEC and SIPC rules (anti-fraud standards
apply)
38
FINRA on 529 Advertising, contd
Past Concerns with 529 Communications:
Not including required basic disclosures
Format of disclosure for print ads and electronic communications
Lack of market risk disclosure
Promissory claims regarding 529 plan success
Lack of disclosure of home state tax benefits where applicable
39
Foreign Language Advertising
MSRB has not issued Rules or guidance for 529 materials:
SEC previously addressed foreign language materials for mutual
funds (e.g., sales literature leads to foreign language disclosures)
Mutual fund rules generally do not apply to 529s
Mutual fund rules might apply to 529 advertisements if materials include:
Objectives of underlying funds
Underlying fund performance
Fees and expenses of underlying funds
Benefits or risks of investing in underlying funds
40
Foreign Language Advertising, contd
Determining whether an advertisement then requires foreign language
disclosure:
Would the advertisement require delivery of a prospectus?
Would the advertisement in context be misleading without further
foreign language disclosure?
Other considerations for regulated entities:
Are all parties dealt with fairly in accordance with G-17?
Would investment satisfy suitability standards under G-19?
Do the foreign language materials comply with G-21?
Have materials been reviewed in accordance with G-27?
41
42
Section 4.
Social Media
43
Social Media Initiatives FINRA
Interpretive Letter on Hyperlinks (November 11, 1997)
Guidance on Blogs and Social Networking Websites Notice 10-06
(January 2010)
Social Media Websites Notice 11-39 (August 2011)
Spot Check of Social Media Communications (June 2013)
Social Media Sweep of 23 broker dealers (2014)
SEC
Natl Examination Risk Alert on Investment Advisor Use of Social
Media (January 2012)
IM Guidance on Testimonial Rule and Social Media (March 2014)
Federal Financial Institutions Examination Council
Social Media: Consumer Compliance Risk Management Guidance
(December 2013)
44
Social Media Initiatives, contd
Overall Goals:
To protect investors from false or misleading claims
Ensure effective and appropriate supervision of associated persons
Generally, rules only apply if content constitutes business communication
FINRA seems more likely to begin or enforce actions now:
October 2014 securities analyst fined for tweets about securities
without disclosing ownership of them
Outcome of 2014 social media sweep:
Reps claimed more knowledge than they had
Recordkeeping was insufficient
45
Types of Social Media Communications as per FINRA
Static
Treated as advertisements under Rule 2210
Blogs or comments that do not change
Registered principal must review and approve in advance of
publication
Interactive
Treated as public appearances under Rule 2210
Electronic forum or chat rooms, on-line seminars
Firms may adopt risk-based supervisory procedures; post-use
review
Must be sure that interactive communication does not violate SEC or
FINRA (and thus MSRB) rules
46
Issues in Social Media Communications
Recordkeeping: Retention policies
Supervision: Principal sign-off
Suitability: Is there an inherent recommendation?
Links to Third Party Sites: Adoption and entanglement
Data Feeds: Confidence in accuracy
47
Social Media Issues
Recordkeeping
Content is determinative (business as such)
3 years
Supervision
If the communication is for business, then the associated person
must be supervised
A registered principal must review prior to use any social media site
that an associated person will use for a business purpose
48
Social Media Issues, contd
Suitability
If communication = a recommendation, broker dealer must
determine the suitability for every investor
Prohibit any links to recommendations unless approved in advance
by a principal
Links to Third Party Sites
Firm is responsible for third party content if it has adopted it or
become entangled with it (it has endorsed the content or worked on
its development)
Disclaimers about the third party posts would be a factor in
determining whether the firm adopted or became entangled with a
posting
49
Social Media Issues, contd
Data Feeds
Firms must have procedures to manage accuracy of data feeds into
their websites
Statistical data is an advertisement and is subject to approval and
recordkeeping requirements
Templates established for data presentation are subject to approval
but data fed into the templates is not subject to recordkeeping
Firm must be able to verify that data is accurate and timely
Must also be able to correct inaccurate data when posted or
over time
50
Social Media Suggested Best Practices
Set policies for use of social media ensuring compliance with regulatory
requirements and reporting to senior management
Establish and implement strict recordkeeping standards for all social
media channels
Supervise all employees business posts and third party posts
Educate and provide ongoing training for all employees
Implement on-going audits for compliance with policies
51
Questions and Answers
Andrea Feirstein, Managing Director
AKF Consulting Group
757 Third Avenue, 12th Floor (AIM)
New York, NY 10017
646-218-9864 office
212-595-1492 fax
917-865-2169 cell
mailto:[email protected]
Appendix
52
53
529 Industry Websites
MSRB Electronic Municipal Market Access System (EMMA)
Primary distributors must file offering documents
Includes direct- and advisor-sold plans available through dealers
As a best practice, issuers of State-managed plans should submit
disclosure documents, too
emma.msrb.org
Emma.msrb.org
54
529 Industry Websites, contd
College Savings Plans Network (CSPN)
Managed by CSPN, an affiliated network of the National Association
of State Treasurers
Provides free access to plan information, feature comparisons and
some performance data
Supported by member dues (states and private sector entities)
collegesavings.org
55
529 Industry Websites, contd
College Savings Foundation
Managed by an industry association that includes program
managers, investment managers, and state administrators
Website provides access to Strategic Insight industry research and
data
Supported by membership dues and contributions
collegesavingsfoundation.org
56
529 Industry Websites, contd
Saving For College
Privately-managed, commercial website for college savings
information
Premium subscription provides access to extensive information about
every 529 plan offered, including investment options and fees
Supported by subscriptions, ad revenues and other fees
savingforcollege.com
57
Additional Sources for 529 Guidance
SEC Investor Publications An Introduction to 529s
sec.gov/investor/pubs/intro529.htm
FINRA Investor Information College Savings Center
finra.org/investor_Information/Smart/529/000100.asp
MSRB -- Municipal Fund Securities
msrb.org/MSRB1/mfs/default.asp
Investment Company Institute A Guide to Understanding 529 Plans
ici.org/statements/inv/bro_529_plans.html
Lifecycle of Planning, Saving, and Paying for College
Key Messages
Overview of the college savings landscape
Lifecycle of planning, saving, and paying for college
College savings and federal financial aid A comprehensive approach to paying for college Resources
National College Savings Landscape
66% of families currently have a plan in place to reach their college savings goals
73% are saving monthly, putting aside a median amount of $250
41% of parents report opening a 529 plan account
Among parents who graduated with student loan debt, 42% are still paying it off
Source: 10th Annual MEFA and Fidelity Investments College Savings Indicator Study, August 2016
The Importance of 529 Plans
A 529 Plan is a tax-advantaged education savings plan operated by a state or educational institution designed to help families set aside funds for future college costs. It is named after Section 529 of the
Internal Revenue Code, which created these types of savings plans in 1996.
The Significance of 529 Plans
With current and next generation savers amassing over $266 billion in their college savings plans, and past savers funding over $110 billion toward higher education over the last 15 years, 529 plans have already enabled families to save over $376 billion toward the cost of college. 529 plans remain the one financial vehicle enabling families to save with tax-exempt earnings.
Over 15 years, 12.9 million 529 accounts with parents, grandparents, and friends contributing to these accounts
5.4 million 529 college savings plans have made distributions Assets in 529 college savings plans have grown 214 percent in the past 10 years
Source: Strategic Insight
Growth of Assets in 529 Plans
As of June 2016, the average size of a 529 plan was $17,949Source: Strategic Insight 529 Data Update Quarterly 2Q 2016
Lifecycle of Planning, Saving, and Paying for College
The Rising Cost of College
Myths About Saving for College
Saving for college means no financial aid.
Its not worth saving for college if I cant savethe entire cost.
The TRUTH: Income is the biggest factor in determining financial aid eligibility, not savings. Your savings will help you when it comes time to pay for college.
The TRUTH: Every little bit saved toward college will help. Even saving a small amount over time can add up and help cover costs such as books.
135
Financial Aid BreakdownUndergraduate Student Aid 2014-15 ($183.9 Billion)
FederalStudent Loans34%
Federal Work-Study
Federal Financial Aid Process
Basic philosophy The family has the primary responsibility to pay for college
(philosophical foundation) Federal and state governments and colleges step in to provide
assistance to offset those college costs
The formula and process A standardized formula is applied to all applicants seeking federal
financial assistance
The treatment of college savings-Up to 5.6% of parent assets are assessed in the process of financial aid awarding
The FAFSA and Other Financial Aid ApplicationsFree Application for Federal Student Aid (FAFSA)
Required by all colleges for federal and state aid Open Oct. 1: FAFSA.gov Sign with an FSA ID: FSAID.ed.gov IRS Data Retrieval Tool to pull in tax data Requires data from all parents who live together,
married or notCSS/Financial Aid PROFILE
Some colleges require for institutional aid $25 for 1st school, $16 for each additional Online application required: CollegeBoard.org Noncustodial Parent PROFILE required when
applicableCollege Financial Aid Application
Required by some colleges Usually part of the admissions packet
Dont wait until youre accepted to
apply!
Must be completed every year!
Expected Family Contribution (EFC) example
Source: ifap.ed.gov/efcguideThe EFC formula above is used within federal methodology.
$$ $ $+ + + = $EFCParental assetsParental income
0% to 47% ofadjusted grossincome minusall taxes andallowances
Student income
50% over $6,420
Student assets
20% of all assets
3% to 5.6% of nonretirementassets
529 College Savings Plans
Brokerage and/ormutual funds
Coverdell Education SavingsAccounts
Prepaid Tuition Programs
UGMA/UTMAaccounts
Other savings
Financial Aid Formula
Cost of Attendance (COA) - Expected Family Contribution (EFC)
= Financial Aid Eligibility
Colleges fill in Financial Aid Eligibility with financial aid from all sources
Luis wants to go to a four-year public school to study business. The full annual cost of the school is $22,500.
Luis Financial Aid AwardGrants & Scholarships $13,000
Federal Work-Study $2,000
Federal Loan $5,500
Total Aid $20,500
Luis family will need to pay $2,000 out of pocket for his first year of school.
Lets Look at an Example
141
Katie wants to go to a four-year private school to study nursing. The full annual cost of the school is $60,000.
Katies Financial Aid AwardGrants & Scholarships $30,000
Federal Work-Study $2,000
Federal Loan $5,500
Total Aid: $37,500
Katies family will need to pay $22,500 out of pocket for her first year of school.
Another Example
142
Paying College Costs Over Time
Families that maximize college savings during the 18 years prior to enrollment will effectively lower their overall cost of education by reducing the amount of education loan indebtedness
MEFAs Approach
Most cant save it all, and no one should borrow it all, but we can all work to provide the information to empower families to achieve the
college dream.
Helpful Resources
Net price calculators on college websites
Federal Student Aid website, StudentAid.gov, for student loan repayment information & calculators
MEFA.org email, social media, blogs:Sign up and follow to stay up to date on information on planning, saving, and paying for college
Contact information
Martha SaveryDirector of Public Affairs, MEFA
mailto:[email protected]://www.mefa.org/
Fundamentals of College Savings Plan Operations
George Betzios & Kaprel Ozsolak
Components of College
Savings Operations
Accounting
Administration
Custody
Record-keeping
149
AccountingRecord all investment related activityInvestment purchases and salesInterest and dividend accrualsDiscount and premium amortization (if applicable)Calculation of gains/losses upon sales
Record plan expensesAccrue plan expensesProcess expense payments
Record all participant capital activityMaintain plans capital accountsRecord participant contributions and withdrawals
150
Accounting (contd)Calculation of daily Net Asset Value (NAV) per shareMark-to-market of assets and liabilities, primarily the investment portfolioDaily calculation of unit values
Key operational controlsTrade and position reconciliation with the investment adviser/middle officeCustody to accounting reconciliation of cash and securitiesReconciliation of receivables/payables to third partiesReconciliation of participant activity and share balances to the transfer agent
ReportingGenerate key accounting reports such as trial balances, general ledgers, transaction journals, NAV calculation reports
151
Administration
Annual and semi-annual financial statements, as applicable Assist with Program description statement/documents Provide data for marketing and other collateral Regulatory filings Analyze and monitor plan expenses Set accruals Process bill payments Calculate and report plan performance
152
Custody
Hold custody of investment securities as well as cash balances Collect dividends and interest on investments Reflect corporate actions within custody records (mergers, splits, stock dividends) Fund participant withdrawals
153
Participant Record-keepingWhat is a Transfer Agent?
A transfer agent is a trust company, bank or similar financial institution assigned to maintain records of investor information and account balances, paying distributions, sending confirmation statements, and issuing and redeeming shares.
A transfer agent is typically registered with either the Securities and Exchange Commission (SEC), Federal Reserve Board (FRB) or the Office of the Comptroller of the Currency (OCC). The type of entity determines with whom the transfer agent is registered. Non Bank entities are registered with the SEC while Banks and Trust companies will register with the FRB or the OCC based on their characteristics and charters. A state member bank of the Federal Reserve System will register with the FRB and a national bank or a bank operating under the District of Columbia Code of Law will register with the OCC.
154
Transfer Agent
Interactions
Custodian: Daily settlement of portfolio units
Accounting: Daily NAVs, unit and service fee reconciliation.
NSCC: Automated trading and settlement with brokerage firms
Account owners / advisors: Account openings, maintenance, inquiries and transaction processing
State regulators: State specific reporting (escheatment, etc.)
IRS: Federal tax reporting
155
Transfer Agency Core FunctionsInfrastructure
Record-keeping platform
Telephone/VRU Web portal access Technology support Mail room services Document
Management Print/Mail services
Client Servicing
Account inquiries Account set up Account
maintenance Research Correspondence Trade processing Process fulfillment
requests
Transaction Processing
Receive & review documents from Imaging/Document Management for legal compliance
Account set up Account maintenances Transaction Processing
Dealer Servicing
NSCC support Advisor inquiries Commissions
support Gain/Loss tracking
& invoicing for as-of transactions
Oversee Omnibus Sub-accounting conversions
Financial Control
Provides accounting with daily net availability
Performs daily settlement
Reconcile daily Demand Deposit Accounts (DDA) Researches all DDA discrepancies
Receive/disburse funds (checks and wires)
Tax & Compliance
Comply with SEC regulations
Comply with IRS requirements
Comply with state laws (escheatment. blue sky, etc..)
1099Q Reporting
156
National Securities Clearing CorporationNSCC is a subsidiary of the Depository Trust & Clearing Corporation (DTCC) that provides centralized clearing, risk management, information and settlement services to the fund industry. As a result of rapid growth in the mutual fund industry in the early 80s many challenges had to be overcome. The mutual fund industry was overwhelmed with increases in processing times, errors, extended operating hours and costs. The ICI and the National Association of Securities Dealers (NASD) formed a joint task force to solve these problems. NSCC was selected to develop an industry standard platform for automating many of the mutual fund back office functions.
157
NSCC - Fund/SERV In 1986 Fund/SERV was launched automating the trade processing life cycle It became the Industry standard for processing and settling pooled investment
product transactions between fund companies and brokerage firms
Order Submission
Confirmation
Registration
Mutual FundBrokerage
Firm
Order Submission
Confirmation
Settlement
Registration
NSCC Fund/SERVSettlement
158
NSCC - NetworkingNew account setup
Account maintenance
Account transfers
Year-end processing
CDSC share lot transfers
Activity reporting
Position reporting
Networking Functions During development of Fund/SERV a need was
identified for exchanging customer information between brokerage firms and fund companies resulting in the development of Networking in 1987
Networking became the industry standard for account reconciliation and dividend processing. Networking allows for all customer account level information to be exchanged and reconciled between fund companies and brokerage firms
Evolved to support many functions including 529 plans
159
NSCC - Networking (Contd) - LevelsLevel 0Is used to identify underlying customer accounts that are held directly at a fund company. This level allows both the fund company and the brokerage firm to share information while the fund company maintains fiduciary responsibility for these accounts.
Level 3Brokerage firms maintain full customer account control, handling all orders, customer statements and reporting. The underlying customers have no direct privileges with the fund company.
Level 4The underlying customers have full account owner privileges directly with the fund or can manage transactions through a brokerage firm. The fund company handles all underlying customer communications and informs the brokerage firm of all customer account record changes.
160
NSCC Omnibus Processing & Omni/SERVSince the late 1990s and early 2000s mutual funds have experienced a growing trend toward omnibus accounting, which means that brokerage firms have taken on more investor accounting functions. This was accomplished by leveraging the functionality of their brokerage systems to provide these services by consolidating client positions into a single omnibus account with the mutual fund. As a result, there was a need for greater transparency and reconciliation between mutual funds and brokerage firms which led to the development of NSCCs Omni/SERV.
Omni/SERV provides a streamlined communication platform for the transmission of Activity and Position files for accounts held in Omnibus, enabling participating trading partners to share sub-account information and creating transparency for Omnibus relationships.
Omnibus Activity File allows firms to transmit detailed trade and sub-accounting client activity Omnibus Position File allows firms to transmit sub-accounting client positions Omnibus 529 Aggregation File - streamlines the reporting process and allow program managers to monitor
and report cost-basis and earnings-to-date amounts, contribution limits and investment election changes
161
Service Provider Oversight Overriding theme: Can delegate but cannot abdicate. Even if fully outsourced, the state agency that sponsors the plan has a fiduciary responsibility to
participants and an oversight role for all aspects of the plan including: Investment management Portfolio valuation Performance calculations Participant record-keeping Disclosure and collateral documents
Oversight must cover all third party entities, including other state agencies through which the plan sponsor may be receiving shared services.
It is highly recommended that the plan sponsor have a formal and documented vendor oversight plan. A successful oversight plan starts at the contract stage, and extends itself to service level agreements,
site visits, initial and ongoing due diligence, reliance on independent auditors reports on internal controls, and where necessary implementing compensating controls.
162
Service Provider Oversight Selected Key Actions Initial and ongoing due diligence
Assess adequacy of staffing at the vendor Perform periodic site visits as part of ongoing due diligence plan Gain an understanding of compliance programs and culture at the service providers Receive and review business continuity plans for adequacy
Review of Service Organization Controls (SOC) reports. Assess user controls If necessary, design and perform testing of relevant controls
Identify potential risks at the service providers that are not mitigated Design and implement compensating controls to manage risk
Establish and communicate desired/acceptable minimum service levels Design and implement ongoing vendor oversight utilizing various tools, including:
review of standard and customized management reports as well as incident/exception reports periodic performance and management reporting meetings remediation of sub-par performance
163
Oversight ToolkitIdentify Potential Risks
Incorrect Net Asset Value calculation Portfolio valuation Income (dividend & interest) and expense
(program fees) accruals Corporate actions (splits & mergers)
Incorrect portfolio investments transacted or settled. Incorrect performance calculations Inaccurate static data capture and maintenance Non-compliance with PDS guidelines/regulatory
requirements Incorrect trade processing and settlement Incorrect client communications (confirms, statements,
tax forms) Deteriorating client experience
Annual site visits Periodic in-person meetings Periodic scheduled calls Exceptions reports Metric