Going to School on 529 Plans

While more education is needed, investors are beco

Few are arguing that Section 529 college savings plans aren't the hottest product going for tuition savers (criticisms over the excessive management fees of some plans notwithstanding). But with that increased interest comes increased scrutiny of these tax-free wonders by average investors. The plans are multifaceted, non-standardized products offered in virtually all states and administered by a variety of investment management firms--everyone from PIMCO, TIAA-CREF, and Putnam to Morgan Stanley, Fidelity, and Alliance--or in New Jersey's case, by the state treasurer. As a recent survey shows, however, investors have begun to develop no-nonsense opinions about which features they consider important, and are becoming increasingly savvy 529 shoppers.

On August 22, New York-based Alliance Capital released the results of its fifth annual College Financial Preparedness Poll, which was conducted by firm Harris Interactive. (Alliance manages the CollegeBoundfund 529 plan with Rhode Island.) It is significant for advisors to first note that despite the increased popularity of these college savings vehicles, 75% of investors still lack a basic knowledge of 529 plans, according to the Alliance poll. There has been some progress, however: 23% of survey respondents say they are somewhat or very familiar with 529 plans, up from 18% in 2001. And for advisors who are already up to speed on 529s, there is some good news: When informed of what 529 plans offer, 57% of respondents say they would be more inclined to save for a child's college education through a 529 plan--up from 51% last year.

The poll reveals that today's investors are demanding certain features in 529 plans. For example, investors want multiple choices in 529 plans, especially in regard to security and investment, and intend to start saving earlier than ever. How early? While survey respondents expect to save the same amount (an average of about $20,000), those who have not already begun to save plan to begin investing in a child's or grandchild's college education much earlier--when the child is around four years old. That's a significant change from the 2001 poll, when the average age was 11. Seventy percent of investors favor the ability to develop a custom portfolio of mutual funds; 69% wish to be able to select age-based portfolios that adjust automatically as the child grows; and 61% want to choose from among more than 10 investment options. The ability to invest through payroll deduction at work (71%) is desirable as well.

But knowing what they want doesn't prevent these investors from being apprehensive about continued market volatility and its effect on their college savings efforts. According to the Alliance poll, some 66% of parents and grandparents are very (29%) or somewhat (37%) concerned about the markets. Naturally, this has affected investor behavior. "People are responding by planning to save much earlier, widening their investment time horizons and opting for more cautious investment approaches in the near-term, such as an insured portfolio feature," says Richard Davies, executive VP of Alliance Fund Distributors, Inc. In fact, nearly three-quarters of survey respondents would prefer their portfolios to be insured against further market downturns, and consider this insurance to be the most desired feature of any 529 college savings plan.

Here are some other interesting poll results:

- Sixty-two percent believe it is important to be able to invest through a financial advisor, while 71% want the option of purchasing a plan directly.

- Respondents did not display a strong preference toward one method of purchasing a plan over the other, instead opting for more choices.

- While state tax deductions are deemed attractive by 70% of survey respondents, 51% say they are looking for the right 529 plan, regardless of whether their home state offers it or not. Only one in ten said that it makes sense to only invest in their in-state plan. (For one reason, a meager 13% of survey respondents say that their home state's 529 plans offer an insured portfolio.)

Harris Interactive conducted the poll for Alliance Capital between July 18-21, interviewing a nationally representative sample of 1,028 U.S. residents aged 18 and over by telephone.

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