Sheldon Whitehouse Asks Witness Why 529 Plans ‘Do Less For Families Who Need Help The Most’

4 months ago

During a Senate Finance Committee hearing on Tuesday, Sen. Sheldon Whitehouse (D-RI) questioned witnesses about 529 Plans savings accounts for young Americans.

Fuel your success with Forbes. Gain unlimited access to premium journalism, including breaking news, groundbreaking in-depth reported stories, daily digests and more. Plus, members get a front-row seat at members-only events with leading thinkers and doers, access to premium video that can help you get ahead, an ad-light experience, early access to select products including NFT drops and more:

https://account.forbes.com/membership/?utm_source=youtube&utm_medium=display&utm_campaign=growth_non-sub_paid_subscribe_ytdescript

Stay Connected
Forbes on Facebook: http://fb.com/forbes
Forbes Video on Twitter: http://www.twitter.com/forbes
Forbes Video on Instagram: http://instagram.com/forbes
More From Forbes: http://forbes.com

Transcript

00:00 Thank you very much. I appreciate the witnesses being here. Let me start by asking Ms. Quinn,

00:05 I'm sorry I've been in the Judiciary Committee, so if you've already gone over this, then

00:10 I may be asking you to duplicate, but could you just give us the sort of summary overview

00:15 of how it is that Federal 529 plans as currently structured do less for families who need help

00:23 the most? Why is it that they deliver greater benefits to the better off? And how does a

00:31 dynasty so-called 529 plan work?

00:34 Sure. Thank you very much for the question, Senator Whitehouse. And let me say that I'm

00:37 familiar with the college-bound Rhode Island program.

00:40 That's going to be my next question.

00:41 Excellent. As well as the Providence Promise. So good work happening in your state. So to

00:47 answer the question about Federal 529 plans, what I can do is speak to Maine's experience.

00:52 And our experience has been that some families, especially those without prior experience

00:56 with 529s or investments, can find it challenging to open an account. So it's uncharted territory

01:01 for them. They're not sure they have the money to save. They don't know that 529s exist or

01:06 kind of why they're there. And it doesn't sound like something that families like them

01:09 do. So those are all barriers to entry.

01:13 Credit to the industry, where there have been a lot of strides for 529s in recent years

01:17 that have simplified account opening, provided multiple ways to contribute, streamlined investment

01:21 choices, and also significantly lowered the contribution rate. When I first started at

01:26 this program 10 or 12 years ago, I think the minimum contribution was something like $350.

01:31 Now it's $5 into our account. So that's really helpful.

01:36 But the tax advantages of 529 aren't particularly motivating for families of lower and moderate

01:41 income who might have little or no tax burden. And the other thing is that because they have

01:46 smaller dollars to invest, families of smaller means will tend to be more conservative with

01:51 their choices. They want to make sure the little bit of money that they have to invest,

01:54 that they don't risk losing that. So they put it in something, even within a 529, as

01:58 close to a savings investment choice as they can. Whereas wealthier families who have more

02:04 income to use are investing more, and they're choosing not necessarily riskier portfolios,

02:08 but maybe even just an age-based portfolio that would be better balanced.

02:12 And so that's the kind of thing that contribute to or can contribute to that inequality over

02:17 time. And certainly something like a Dynasty 529 plan that, again, not my area of expertise,

02:23 but as I understand it, it allows for a change in the beneficiaries that mean that more monies

02:28 can be invested over an even longer period of time, which could be a great thing for

02:31 some families, but can absolutely contribute to the inequality. Which is why a universal

02:36 platform like we have in Maine, like they have in the state of Pennsylvania with Keystone

02:40 Scholars, like is being proposed in 401Kids, that would put meaningful dollars in for everybody

02:46 automatically and universally at birth in ways that get everybody onto that same platform.

02:51 Well, thank you very much. And you were good enough to mention Rhode Island's College Bound

02:57 program. So let me ask Dr. Elliott a question or two about programs like that. By the way,

03:04 my recollection is that the College Bound program was the creation of a dear friend

03:13 and former state treasurer, Paul Tavaris. And it has grown considerably since then.

03:20 But he really had the early wisdom about the importance of getting behind this. And as

03:27 I said, it's grown better since then. So Dr. Elliott, how do child savings accounts like

03:33 those created by Rhode Island and those proposed by Senator Casey address the shortcomings

03:41 of federal 529s? How do they ensure that the benefits go to those who need it the most?

03:48 And why is automatic enrollment important in that context?

03:54 Thank you, Senator. Yeah, so there's a number of advantages to CSAs that I think has kind

03:58 of been lost in some of this discussion here. One is the fact that low-income people, while

04:04 they can save, we've shown that with experimental evidence, they can save small amounts of money.

04:08 And so what CSAs do by adding some money into the account for the kids with initial deposit

04:13 or whatever else, we've seen even in Maine's case, we've done some research on that, is

04:17 that initial deposit really matters for them building wealth over time, particularly for

04:21 low-income families because they can't contribute as much as wealthier families. I think about

04:25 it even from the sense of if you have a high-interest account, if you have $10,000 to put in that,

04:33 you'll earn a lot more than if you have a little amount of money in it. So these CSAs,

04:36 the money being put in there really actually matters. They also streamline access to it.

04:41 So automatic enrollment, it allows every kid, and this behavior economics is a well-established

04:46 fact, it's much easier to put people into a program than it is, and they won't opt out.

04:51 And we've seen less than 1% of people opt out of these programs in most cases. And so

04:55 once they're put into their programs, they stay in and they get to have those experiences

04:59 with the account, the higher expectations, the social, most of all these early outcomes

05:04 that we're seeing, by putting them into the account, we assure that all families get access

05:08 to these kinds of benefits and opportunities. And then by adding some money to those accounts,

05:12 we allow them to build wealth to lower the wealth gap.

Sheldon Whitehouse Asks Witness Why 529 Plans ‘Do Less For Families Who Need Help The Most’

Category

Transcript

Recommended