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Financial Planning > College Planning > 529 Plans

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In 1999, less than half the states in the U.S. offered 529 college savings plans. Among those that did, investment choices were limited, maximum contribution limits were relatively low, and Web access was minimal, if it existed at all.

Today, more than $20 billion is held in 529 savings plan accounts–more than twice the assets held there last year–with the total expected to reach $32 billion by year-end and $145 billion by 2008, according to a recent study by Cerulli Associates, the Boston research firm. All 50 states and the District of Columbia offer plans, and most offer a wide variety of investment options. Many plans have beefed up their Web presences and now offer online account access or enrollment, says Luis Fleites, a Cerulli analyst who co-authored the report. And maximum contribution limits have been significantly increased. The average is $240,000, with Louisiana having the lowest limit, at $173,065, while South Dakota is highest, at $305,000.

But not everything is peachy in the land of college savings. True, the market is burgeoning, and since only 4.3% of children under 18 have opened accounts, there’s plenty of room for additional growth, says Fleites. The problem, at least for plan providers, is that it’s turned out to be very hard to make money. “A couple of years ago, providers were battling to get mandates to offer these plans,” says Fleites. “Because many different providers entered the market, a large portion of them are struggling to gain market share.” Indeed, according to Cerulli, 10 plan providers control 82% of the assets held in 529 plans, with TIAA-CREF first, Alliance Capital second, and Fidelity third. Yet even they are struggling because of low average account balances. The average account balance of $6,457 “in many cases falls short of covering administrative and operational costs,” according to Cerulli.

But there may be good news for independent advisors looking to add 529 plans to their repertoire. “Based on our interviews with providers, the [distribution] channel showing the greatest signs of success in terms of advisors selling the plans is the independent broker/dealer channel,” says Fleites. In 2002, two-thirds of new assets flowing into 529 plans came through advisors, according to Cerulli, while in previous years the majority of plans were sold directly to the consumer. Fleites expects this shift to continue as 529 plans become increasingly complex and create among consumers a greater need for guidance.

MFS Investment Management, the Boston-based money management firm, is a newcomer to the 529 plan program administrator space, having launched the MFS 529 Savings Plan for Oregon. James FitzGerald, president of MFS Fund Distributors, notes that the MFS plan offers two investment approaches: a suite of traditional mutual funds from which participants can build their own portfolio, and MFS’s Asset Allocation Funds, four funds that are based on the investor’s objectives, risk tolerance, and most important for 529 plans–time horizon. FitzGerald suggests that many advisors have not put clients into 529 plans because of their complexity. “Not more than 20% to 25% of reps” are currently using 529 plans, FitzGerald notes, though he believes that “as there’s more and more education about them, the rep base that uses 529s will broaden.”

Eileen Dorsey, an advisor with Money Consultants, Inc., in St. Louis, has little trouble finding clients in need of guidance on 529 plans. She often recommends the Missouri 529 plan to in-state residents who have young children and who can set up an automatic monthly deposit to the account. Yet while many clients take her up on her advice, some still balk because of the penalties and restrictions on 529 assets. “I think the potential of all these restrictions makes clients hesitate,” she says. “On the one hand, [the state] encourages people to save, but on the other hand, it puts so many restrictions on the vehicles that it makes saving difficult.” While it’s uncertain whether the Lifetime Savings Accounts (LSAs) proposed by the Bush Administration earlier this year will ever become a reality, both Dorsey and Fleites suggest that if LSAs are enacted, their greater flexibility will make them a tough competitor to 529s.


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