Heard Off the Street: Savings plans may not meet needs

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There are signs of progress in the crusade to get Americans to save more for their children's college education as well as for their own retirement. It's an uphill battle in that they must do both simultaneously.

Assets in 529 college savings plans reached a record $190.7 billion at the end of last year, according to the College Savings Plan Network, a nonprofit affiliated with state agencies that sponsor the savings plans. The group said families have nearly 16 percent more in the accounts than they did a year ago.

The number of 529 accounts increased nearly 4 percent over the last year to 11.1 million, while the average account balance increased almost 12 percent to a record $17,174. Contributions to the accounts in 2012 totalled $21.2 billion, up nearly 8 percent from the $19.7 billion contributed the previous year.

States sponsor the college savings plans, which offer significant tax advantages. Money in 529 accounts grows tax free and withdrawals are not subject to federal income taxes if the funds are used to pay tuition and other qualified higher education expenses.

For Pennsylvanians, withdrawals used to pay for college expenses are also exempt from state income taxes.

Moreover, Pennsylvanians can deduct up to $14,000 per child in 529 plan contributions from their taxable income on their 2013 tax returns. Married couples filing jointly can deduct $28,000 per child as long as each spouse has at least $14,000 in taxable income. For more details and information on the two 529 plans Pennsylvania sponsors, go to www.pa529.com.

Pennsylvania also reported encouraging news for its 529 plans. Enrollment increased more than 5 percent in the fiscal year that ended June 30. Contributions increased nearly 8 percent to $358.8 million, while assets in the plans rose nearly 7 percent to $2.5 billion.

As heartening as the news is, some context is required.

Nationwide, the record $17,174 in the average 529 plan account is about $700 less than you'll need to pay one year's worth of tuition, fees, room and board at the average in-state rate for four-year public colleges. That will cost you $17,860 for the current school year, according to the College Board.

The organization said the average out-of-state rate for the 2012-13 school year at a four-year public school is $30,911. It jumps to $39,518 for private schools, or double the amount in the average 529 account.

There's also moderately positive news for 401(k) plans, retirement accounts that make individuals responsible for how much of their paycheck they set aside for retirement and how that money is invested.

A report issued last week indicates 53 percent of employees of large companies who participate in their employers' 401(k) plans defer 5 to 7 percent of their pay. Another 20 percent chip in 8 to 10 percent while 4 percent contribute more than 10 percent, according to a survey of employers by the American Benefits Institute and WorldatWork.

The institute is the research arm of the American Benefits Council, which lobbies for companies on employee benefit issues. WorldatWork is a nonprofit that serves human resource professionals.

The two groups reported that 73 percent of the companies surveyed said at least 70 percent of their employees participate in the retirement plans. Contributing to the plans is important because experts say current workers should expect a significant portion of their retirement income to come from 401(k) accounts as well as from IRAs.

To help more workers save, Congress enacted legislation in 2006 that allows companies to automatically enroll employees in 401(k) plans and systematically increase the amount they save each year. Those measures are boosting savings rates at companies that take advantage of them. That's because even though workers can stop the automatic deductions, most do not take the initiative to do so.

The groups said the study shows employers and employees remain committed to 401(k) plans despite the recession. They said 88 percent of the companies did not suspend or eliminate matching contributions over the last five years. And fewer employees took hardship withdrawals or borrowed money from their accounts than they did during the recession, the report indicates.

Again, some context is needed.

The study looks primarily at large employers, which are more likely to offer 401(k) plans.

When the universe is expanded to include small companies, the participation rate for full-time, year-round employees falls to about 54 percent, according to the Employee Benefits Research Institute. The research group found that across all age groups and all earnings levels, the smaller the employer, the lower the 401(k) participation rate.

Moreover, those who are participating are not saving enough. Compare the 5 to 7 percent payroll deductions that roughly half of the employees in the study are saving with what experts generally agree they should be saving: 10 percent or more.

Just contributing the 6 percent or so it takes to qualify for matching company contributions "will not get you to a great place at retirement age," said Robert Nusbaum of Middle American Planning in Mt. Lebanon. The certified financial planner said the closer someone can get to saving 15 percent of their pay, the better.


Len Boselovic: lboselovic@post-gazette.com or 412-263-1941.


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