Do Not Invest In A 529 (Or Able) Plan
One of my biggest concerns as a financial advisor is not a market crash or missing out on Bitcoin level bubbles.
My biggest concern is the increasing push by government to play a larger role in managing and holding your investment dollars.
Mark Glennon of Wirepoints, a media site that covers Illinois economy and government, recently published an article that shows that despite the common belief that 529 plans are run largely in sound investment approaches by professionals, the State Treasurer of Illinois has been actively using the fund to promote and coerce companies to act in certain ways.
The obvious problems here are state plans and treasurers can utilize funds for their incentives, rather than for the sole benefit of the investor, whether that means advancing their political party, their careers, or local companies.
On top of this, investors have no idea what a current or future treasurer may use their funds for. State treasurers may gain power over ‘legislating’ corporate activities that supersede issues that voters believe they have settled at the ballot box.
In reviewing the Illinois Treasurers website on Environmental, Social, and Governance (ESG) items which guide their investment policies, I found nothing I could rely on to know how an investor could gauge their use of these criteria to meet their personal investment goals.
For example, what does it mean to invest based on “climate change”? Investors from 10-15 years ago would have not figured the long-term consequences of “climate change” in their calculations whether or not to invest for college. Perhaps if they believe climate change will impact the future, they would avoid investing for college, or choose to save in other ways.
My point above is not on whether investments should consider these factors, but it is how and to what benefit, and how can fiduciary advisors recommend an 18-24 year investment with a manager who may use personal politics to guide their choices?
While I do not want to get into the concept of ESG investment here, I question how social, sustainable, environmental, and of “good governance” the firms that are high on many of the index providers lists would actually score if investors were aware of the companies they were investing in.
Many "ESG" highly ranked firms are in the news lately for what could be seen as the opposite of what investors may consider good ESG practices. I see firms at the top of most index lists in recent news for massive fines for their anti-environmental practices, for receiving bailouts, or using their media to promote anti-sustainability messages, etc.
Overall, my opinion on ESG investing is that it is impossible in practice, but good business for investment funds and advisors to market to take advantage of the higher costs of implementing their methods.
When a bureaucrat uses the reasoning of ESG for management of their investments it is entirely different than an investor choosing to pay more to feel they are investing for ESG purposes. For one thing, savers who invested 10 years ago may not agree with the goals of today's ESG methods.
A real world example is that the Illinois Treasurer in the article above felt it was worth his time to use his investment to influence Facebook regarding what he considers ‘fake news.’
(For those not familiar with Facebook’s news feed, it is largely set to provide news from sources the readers choose to be included in their news, so I am not clear exactly what the Treasurer was trying to influence aside from perhaps the elimination of news sources. This should be concerning for those who choose that news, but clearly will not stop them from getting that news from another source.)
Unlike an investment manager, a politician can use the guise of ESG to use your college fund for many purposes that they believe will benefit society, even though it is in conflict with your personal beliefs and your personal goals for your investment. He can supersede voters, courts, legislature, and executive, using funds to attack political opposition (as the term 'fake news' seems to imply, I've seen no specific 'news' that is objectionable) or help gather support and resources for his own party.
Many investment advisors default to an investment in a 529 plan for college, and it could be said that advisors initially were responsible for building the 529 industry by their recommendations. Advisors did not recommend the MyRA account and it no longer exists.
Advisors frequently recommended using a special 529 provision that allowed grandparents to save $60,000 in the first year to a plan. These contributions, which dwarf the $2,000 maximum to the free market Education Savings Account vehicle, likely are responsible for the 529 existing today, but certainly at the size and market power they have accumulated.
The use of their savers money to allow treasurers to become activists should now give every investment advisor and investor pause before making an investment in a fund that increasingly will be used for political purposes.
When the state takes an active role using your money, there are devastating effects on savers and citizens:
Savers can not invest in a fund that they do not know the risks or benefits. Investing is taking known risks. Giving money to a manager to pick winners and losers is speculating when done with professionals, and it is gambling when done with amateurs. Hiring a bureaucrat to be your investment manager is a massive gamble.
I have always suggested a 529 plan is at best a quasi-investment since the state can and has changed managers and allowed funds. Investors can not know what funds they will have access to today or in the future, and they can not know how the politics of future managers will guide their investment choices.
The state treasurers have significant conflicts of interest in the stocks and program managers. Already, many state plans are run by local or regional firms. It is difficult to believe there is no quid-pro-quo today between the firms they choose as these politicians seek higher offices. It is impossible to believe that a politician who dictates what companies these managers invest in will not further abuse that power for donations and other purposes.
An ‘investment’ in a 529 plan is encouraging states to ignore fiscal emergencies and play money manager. The Illinois Treasurer is a life-long bureaucrat, not an investment manager. Illinois is one of several states considering running retirement accounts. Oregon recently began a retirement account program which forces their state employers who do not offer retirement plans to become enrollment agents for a state-run account that charges more than 10x the going rate for a S&P 500 index fund investment. This makes it hard to believe states are concerned with “fiduciary” duties rather than finding ways to raise money while ignoring their duties to the citizens of their states.
States may be lobbying to eliminate competition and choice, using your money and the influence it provides to remove options from the market. Initial proposals for tax reform included eliminating free-market Education Savings Accounts (ESAs) and handing that money over to the state 529 plans. ESA growth has been hampered over the last generation by increasing benefits given to state-run 529 plans and no corresponding benefits given to savers who want to keep the government out of their investment holdings. Where ESAs give the investor total control over costs, risk, and investment provider, 529s have only been more successful due to the uneven playing field they have in terms of higher contribution limits and the use of state funds to market awareness.
Investing involves a time horizon of at least five years, though ideally ten years or more. For that reason alone I have always been hesitant to recommend state 529 plans; yes, investors generally have this time horizon, but only for a limited time.
While many college investors start with a long enough period to invest, they quickly reach a point of not being able to risk their college funds. States are conflicted when it comes to accepting an investment from someone who should not be and provide that advice in the first place.
States have a massive advantage over private and professional investment managers. Your fiduciary investment manager has significant and increasing costs to comply with regulatory bodies and disclosing risks to clients. Your state ‘investment manager’ has no such cost or risk, and as is evident by the political speak on the Illinois website they have little duty to make it understandable to savers or professionals.
Investors have no recourse against a state mismanaging funds. And, they will mismanage the funds as can be seen by just about every state-managed pension fund. State-run prepaid 529 plans have failed and been closed, and there is concern today about those states who still run prepaid plans. Investors who trusted the state when they took out investments over a decade ago will just be out of luck when it is time to collect on poorly run plans.
Even the current Illinois Treasurer notes that under "his tenure, Morningstar [a rating agency] has upgraded our [IL] 529 college savings programs."
And, he is right. The prior Illinois plans were high cost and had many 'active' funds.
However, all the Illinois Treasurer had to do in order to increase the ratings was lower investment costs and provide competition, which is what the IL Plans have done over time. Whether or not the current treasurer can take credit I can not say, but the fact remains it is hardly something worth bragging about as often as I've seen in releases and on social media.
And, as a libertarian, I criticize anyone - the Democrat Illinois Treasurer or the Republican President - who takes credit for influencing the market by threatening companies. The reason the IL 529 plans have increased in ratings has been moving to lower cost, indexed options which removed active, high-cost management.
Activism adds high-cost to the mix. Spending time on activism means there is a cost, though it may ultimately be paid by the taxpayers of Illinois and not the 529 shareholders.
While states like Illinois are going bankrupt and there is significant concern regarding their management of prepaid 529 plans and pension investments, their Treasurer is playing active and activist investment manager.
The vast majority of full-time professional, politically unconflicted investment managers should not be engaging in activism; it is hard to believe that the Illinois treasurer can do so effectively. The vast majority of investors should not hire someone to actively gamble with their money.
It is highly concerning that states are taking this approach your college funds, and many, like Illinois, are looking to push their management of your investments in retirement accounts. Consider all of your investment options and opportunities prior to believing a 529 plan will be a sound option over the coming years. An ESA may be a better vehicle for those who qualify. A Roth IRA strategy (as I’ve written about for Forbes) or taxable brokerage account can also provide benefits with control, multiple uses, and the simple fact you will know how your money is being invested. Savers should consider their future income potential being used to pay for college, as well that college tax credits and future state aid is not allowed to people who save to 529 accounts.
All in all, most have better options than to save to a 529 account, and I have always tried to guide savers to consider all of their options.
Knowing now that your money will be used for political purposes and that we can’t know what that will mean to the next people in control, all should think twice about the power they are giving to states by giving them their investment dollars.