Broker-dealers that sell 529 college savings plans are broadening the disclosures they give clients buying out-of-state plans. The change was mandated by a new MSRB rule went into effect earlier this month.

Meanwhile, Morningstar and the College Savings Plans Network are working to help the firms with the increased disclosures.

Investor activists and regulators have long been concerned that investors were missing out on the state tax benefits many 529 plans offered their residents. The problem is that many investors bought their 529 plans through a broker, who typically recommended plans from their firm’s preferred list.

The new rule, which passed in April, requires dealers to provide detailed information to clients about their home-state plan before they finalize the sale of an out-of-state plan. The three main points of the disclosure include informing a client that they may receive better benefits in their home state plan. The rule also requires brokers to advise their clients that they need to weigh all the available plans before making a decision.

Previously broker-dealers had to provide some disclosure. But Ernesto Lanza, senior associate general counsel, at the MSRB, said the new rule is much more specific about what needs to be done.

“[Before the dealers] needed to make sure that the basic disclosure was being made, but now they have to make sure the plan is suitable for the client,” Lanza said.

However, the MSRB does not provide guidance to its members on the best way to provide the disclosure. And in some cases the dealers simply have to tell the client there may be tax benefits with other plans.

“The dealer is not obligated to know a customer’s in-state benefits,” Lanza said. “However if they do know it and tell the client, they have to make sure that the information is updated and accurate.”

Dealers also do not have to provide specific resources where the information can be found, though other organizations are offering ways to help. The College Savings Plans Network is upgrading its web site to include more detailed information.

“We want to make the differentiating information readily available to the investor so they can make a good decision, “said Jackie Williams, director of the Ohio Tuition Trust Authority and chair of the College Savings Plans Network.

The original web site just provided tax information but did not include information as complex as what the group is planning. They have been working on the project, along with the MSRB, for more than a year now. The group is targeting for it to launch as early as this fall and will target advisors when it’s launched.

The website will go beyond just listing tax benefit information to out-of-state residents. It will also provide fees and investment strategies. When completed, a client can pull up two different plans and compare them side-to-side, Williams added.

Morningstar has launched a similar tool called Morningstar’s 529 Suitability Manager, which will create disclosure reports and straightforward summary charts that help the investor choose the most suitable 529 plans.

“We’ve created a tool for advisors that takes the complexity out of performing a thorough 529 plan suitability analysis for their clients,” said Chris Boruff, president of Morningstar’s advisor business. “We believe we're the first company to offer a tool for advisors that provides complete disclosure reports including both fees and state tax benefit information from one source.”

Both resources will be made available to broker-dealers as a way to fulfill the MSRB requirements. With those tools, Lanza believes firms will be able to handle the additional disclosures in stride, but emphasized that the MSRB would do what it can to help those firms that needed it.

The rule goes into effect as 529 plans have been increasing in popularity. The number of 529 plan accounts increased to about 8.6 million in the first quarter of 2006, while the average 529 savings plan account size was about $11,500, according to research from the Investment Company Institute and the College Savings Plans Network.

Clarification:
American Funds Distributors is challenging NASD charges that it directed brokerage commissions to broker-dealers who gave its funds preferential sales treatment. It has not been fined by the regulator.

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