Harvard Alum Wants To Disrupt 529 Plans
Updated On November 1, 2021
Editorial Note: This content is based solely on the author's opinions and is not provided, approved, endorsed or reviewed by any financial institution or partner.
If you speak with Marcos Cordero, the co-founder & CEO of Miami-based Gradvisor, he’ll share with you two troubling statistics about college savings.
First, 80% of parents don’t know what a 529 plan is, and second, 60% of those saving for college don’t use a 529 plan.
That didn’t sit well with the former engineer and MIT and Harvard Business School alum.
So, he started Gradvisor to help more people save for college and encourage employers to become more active participants in the college savings process.
A 529 plan, or qualified tuition plan, is a tax-advantaged vehicle to help save for college costs and is sponsored by states, state agencies or educational institutions in accordance with Section 529 of the Internal Revenue Code.
I interviewed Cordero about his plan to disrupt the college savings industry, how and when to fund a 529 plan, and how employers can help their employees save for college.
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Zack Friedman: Why did you start Gradvisor? What problem were you trying to solve?
Marcos Cordero: I realized that there is a widespread lack of awareness among parents about the best ways to save for future college costs.
Just as you wouldn’t save for retirement with a savings account, parents need to use the right tax vehicle when saving for their kids’ college education.
Parents need to treat saving for college like saving for retirement – contributing every month over time to take advantage of compounding interest and making portfolio adjustments along the way.
Zack Friedman: How does Gradvisor work?
Marcos Cordero: Gradvisor is a digital platform that helps companies incorporate 529 plans into their benefits packages.
We function as a robo–advisor, using algorithms and data to recommend the best 529 plan to each employee based on his or her financial situation, geographic location, goals and comfort with risk.
In addition to being able to automatically make payroll deposits to their 529 plans, employees also receive access to one of our financial advisors who can provide guidance on saving for college.
Additionally, some of the companies we work with offer to match contributions, similar to a 401(k).
Zack Friedman: There are multiple 529 providers in the market. How is Gradvisor different?
Marcos Cordero: Most companies that currently offer 529 benefits choose one 529 plan that would work best for the highest number of employees (most often in the state where most of its employees live).
Gradvisor is different in that we offer any 529 plan for any employee and use completely unbiased algorithms to recommend the best fit.
If you are in a state that does not offer a tax deduction/credit on 529 plan contributions, you should absolutely be shopping around for the best plan, so employers who offer their state’s plan in this situation could be doing their employees a disservice.
Zack Friedman: Given that 529 plans are primarily state-centric, how does Gradvisor work with companies with geographically diverse employee bases to help solve this problem?
Marcos Cordero: We are able to address the needs of the market that’s known as the ‘holy-grail for 529s’: the employer channel. If you are a large employer, you likely have employees in different states and each one of these employees needs access to different plans.
Without this access, employees could lose out on important benefits offered by a certain state to its residents.
It is far too big of an undertaking for an employer to offer every plan form across the country to its employees and set-up payroll deductions for each. Due to these difficulties, many employers who would love to offer 529s don’t.
We’re also encouraging people to save more and earlier for their children’s education.
For example, the average Gradvisor user begins saving for college when their child is five years old, compared to the overall average of 7 years old.
Gradvisor users save $236/month compared to the overall average of $175/month.
Zack Friedman: How critical is an employer match program for a 529 plan?
Marcos Cordero: Once an employer agrees to offer 529s to their employees, the single best way they can help them is by offering a match on contributions.
Even something as little as matching the first $25 an employee puts into an account can be just the encouragement one needs to get started. If an employer isn’t in the position to do that, it is important that they still commit to educating their employees.
Zack Friedman: How can people who think they can’t afford a 529 plan actually afford one?
Marcos Cordero: We recommend creating a 529 plan as soon as you become a parent (you can even open and start saving in a 529 plan before your child is born).
Given the number of 529 plans available to parents, choosing one can also be intimidating. We take the guesswork out of that process by selecting the best one for each employee based on their specific financial situation and goals.
Beyond even selecting which 529 plan to open, choosing a proper investment portfolio can be daunting as well.
For those who don’t believe they can afford it, we first must convince them that it’s worth it. [According to] The Center for Social Development, “Children with $1 to $499 designated for school are 2.5 times more likely to enroll in and graduate from college than children with no account.”
From there, we stress the importance of putting a little bit away at a time. If families can put aside $5 a week, it can go a very long way by the time their child attends college.
Zack Friedman: If someone is expecting or has a newborn, what should be their 529 strategy?
Marcos Cordero: The reality is that every person’s financial situation is different. Some people can afford to contribute the minimum. Some have the ability to fund a certain percentage. Some can afford to ‘superfund’ their plan with $140,000 up front. Our goal is to maximize every dollar that is put into that account.
However, regardless of their situation, we always encourage our clients to do automatic monthly contributions if they are not funding with a large one-time deposit. This allows them to have a plan in place and also to take advantage of dollar-cost-averaging.
The best thing for someone with a newborn is to not delay. Next thing you know, you put off starting a 529 plan, you blink and you’ve lost 5 years of contributions and compounding interests.
You can be a more aggressive investor when a child is younger so these are critical years. Start off with what you can and as your financial situation improves, increase your monthly contribution.
Zack Friedman: Life comes with a lot of financial obligations – student loans, a mortgage and other major expenses. What about the parents who never funded a 529 plan and their child will start college in 10 years? What do you recommend they do?
Someone who is getting a late start needs to find the right balance between playing catch up, but not being overly aggressive.
If you are located in one of the 34 states that offer a tax deduction/credit, be sure to take advantage of that.
Illinois, for example, allows joint filers up to a $20,000 deduction on their state taxes for contributions into an Illinois 529 plan. That can go a long way.