May 17, 2010

529 Plans Get More Insured Investment Options

FDIC accounts now available in seven states, federal bill recently passed

Ivy Slike had a problem. In September of 2008, when the financial crisis hit, the Hailey, Idaho-based single mother of two was about to send her eldest daughter off to college. But the investments set aside to pay for four years of tuition had recently lost 15% of their value, on their way to eventually losing 40 percent. With pundits and prognosticators envisioning a long, slow slog, Slike wondered if a rebound would come before graduation, and if not, what was to be done.

"I wasn't sure if we'd be able to pay for the fourth year, and maybe a portion of the third," she says. "I was going to make sure she graduated, but it would require some heavy restructuring of the plans we had in place."

The plight of retirees in recent years is well-documented. Sequence-of-return risk and retiring in down markets combine to devastate portfolios, from which they will most likely never recover and necessitating either a return to work or a significantly diminished lifestyle in retirement.

Less well documented is the plight of parents and students, who like Slike, thought four years of college were fully funded only to come up short due to unexpected market events.

"I would gladly have given up some of the gain in order to have some sort of guarantee that the money would be there when I needed it," she says.

Slike isn't alone, and more states are responding with FDIC-insured options within their 529 college savings plans. Currently seven states--Arizona, Colorado, Montana, Ohio, Utah, Virginia and Wisconsin--offer FDIC options within their plans, with more likely on the way. North Carolina's 529 plan offering recently introduced a certificate of deposit option insured by the National Credit Union Administration.

In November 2009, Colorado introduced its CollegeInvest Smart Choice College Savings Plan, the state's only FDIC insured account thus far.

"We have 860 accounts signed on so far, with $2.5 million in assets," says CollegeInvest spokesperson Angela Baier. "Fully 58 percent of individuals save for college using traditional savings accounts. The Smart Choice plan aims to get conservative investors like these out of savings accounts so they can get the full tax benefits to which they're entitled."

On April 20h, Congress quietly passed the Deposit Restricted Qualified Tuition Programs Act of 2009, which opens FDIC options to all state 529 plans. Sponsored by Rep. Emanuel Cleaver (D-Missouri), the act, "amends the Federal Deposit Insurance Act to prescribe requirements for deposit restricted qualified tuition programs which are exempt from federal income tax."

According to the text, it defines such a program as one in which:

  • -- the cash provided to it by a contributor may be invested only in deposits insured by the Federal Deposit Insurance Corporation (FDIC);
  • -- the contributor may become a participant in the program by depositing funds into an account at a depository institution participating in the program; and
  • -- the program may include multiple depository institutions. Deems a deposit restricted qualified tuition program to be an identified banking product for purposes of the Securities Exchange Act of 1934. Denies treatment as a security under the Securities Act of 1933, the Securities Exchange Act of 1934, or the Investment Company Act of 1940.

John Sullivan is editor-in-chief of Boomer Market Advisor and AdvisorBiz.com, part of Summit Business Media's Advisor Media Group.

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