The Tax Cuts and Jobs Act expanded the definition of qualified education expenses to also include $10,000 for K-12 tuition, in addition to various college expenses.
Share class selection within a 529 plan should factor in the intended use of the 529 and the anticipated timeframe for distributions starting, while considering the ongoing and long-term expenses associated with different share class options and the client’s best interest.
Since distributions can now be utilized throughout the various education stages of the 529 beneficiary, and vendors have revised fee structures to align with Regulation Best Interest, ESI is updating the policy related using of C shares within 529 accounts.
C shares will no longer be prohibited based solely on the 529 beneficiary’s age effective 10/1/2023. In general, A shares should be utilized for younger 529 beneficiaries, unless the intended use is for K-12 tuition and anticipated to start within 6 years, or the C share option is more cost effective than the A share alternative.
529 Municipal Securities Disclosure
To assist you in documenting the intended use of 529 distributions and when they are anticipated to start, the 529 Municipal Securities Disclosure has been updated to include a new section that must always be completed and initialed by the client:
The updated version should be utilized on all new 529 accounts, for existing accounts if it is not already on file, or if a switch is occurring. Switching is recommending the sale of one 529 fund where a front-end or back-end load was paid, to buy another 529 fund with a sales load that could be avoided through the selection of a different fund.
The Switch Disclosure section has also been updated. Suitability Principals will continue to reach out to Registered Representatives (RR) when there is a missing 529 Municipal Securities Disclosure or if the switching language is missing, not complete or not acknowledged by the customer on the 529 Municipal Securities Disclosure for switching transactions.
If the required information is not received after 30 days, ESI will send out a switch letter directly to the client. This letter will discuss what the customer needs to understand when deciding to engage in a Switch, specifically, that the new sales charge could have been avoided had they remained in the fund they just exchanged, or exchanged the investment for a new fund in the same fund family. In addition, an administrative fee of $250 fee will be assessed to the RR for failing to provide the required information within 30 days. Repeated missing or incomplete 529 Municipal Securities Disclosure may result in disciplinary action being taken.
FINRA Fund Analyzer
The FINRA Fund Analyzer comparing A vs C Share versions of the selected fund(s) will be required any time C shares are utilized within new 529 accounts when the intended use timeframe exceeds 6 years. It will also be required on existing 529 accounts utilizing C shares when additional investments are made that exceed $1,000 and the intended use timeframe exceeds 6 years.
You can access the FINRA Fund Analyzer through finra.org (For Investors > Tools & Calculators > Fund Analyzer) or https://tools.finra.org/fund_analyzer/.
While FINRA no longer has a designated 529 version of the Fund Analyzer, the standard version does include some 529 specific funds when you search for them:
If the 529 specific version of a fund isn’t available, you can still utilize the Fund Analyzer by selecting the regular version of the fund and then using the “Advanced Options” functionality to manually enter the different features such as Loads and Share Conversion that the 529 version would have:
The completed Fund Analyzer should be uploaded into the Docupace work item and should also be provided to the client. Do not use the “Share” function located within the FINRA Fund Analyzer.
Existing 529 Accounts
If an existing 529 account changes which share class is being utilized through new deposits or switches, then a new 529 Municipal Securities Disclosure should be completed. Additionally, if an existing 529 account doesn’t have the current version of the 529 Municipal Securities Disclosure on file which identifies the intend use and timeframe the form may be requested by Operations.
Breakpoint Checklist and Worksheet
As a reminder, when the 529 Municipal Securities Disclosure form is completed, the client is attesting that you reviewed the Breakpoint Checklist and Worksheet (“Worksheet”) with them when purchasing Class A shares. The Worksheet is not required to be submitted with paperwork to ESI for suitability review. However, a copy of the Worksheet must be kept in the client file. If you use Docupace as your client file, the Worksheet must be kept in Docupace. A review of breakpoint worksheets is completed during branch examinations. Failure to obtain copies of the Worksheet in your client file may result in examination deficiencies or disciplinary action.
Dealer Changes
If an existing 529 account is moved to ESI through a dealer change the 529 Municipal Securities Disclosure should be completed for both in-state and out-of-state scenarios.
Questions
If you have any questions, please contact your supervisor or ESI Direct Business Suitability at 800-344-7437.
TC136407(0923)1