The 529 college savings plan market is booming–particularly among plans sold through advisors. At the end of 2004, 82% of 529 sales came from advisor-sold plans, according to Financial Research Corp. (FRC) in Boston. By the end of the first quarter of 2005, total assets in 529 savings plans reached $55.4 billion. FRC estimates that by 2010, combined sales among both prepaid and savings plans will hit $300 billion.
Jeff Troutman, VP of program management and development for the Fidelity Advisor 529 Plan, which is sponsored by New Hampshire, says advisor-sold plans are generating more sales because individual investors need advisors’ aid in navigating the ins and outs of 529s. “Advisors add value in helping investors eliminate or mediate the complications of investing in 529s,” he says. Sales of direct-sold plans at Fidelity “have been more flat.” Sales in Fidelity’s Advisor 529 Plan reached $500 million in 2004, with total assets in the plan now at $1.3 billion. Between June 2003 and June 2005, assets in Fidelity’s advisor-sold plan grew by 259%. Total assets in Fidelity’s five 529 plans, which includes the advisor-sold plan and four direct-sold plans, are at $6.5 billion.
Fidelity has also noticed that portfolios with a targeted maturity date, or age-based portfolios, have become increasingly popular among investors. Troutman says 75% of all money flowing into Fidelity’s 529 plans is going into age-based portfolios. Investments in these types of portfolios become more conservative as a child nears college, so, for instance, a newborn’s portfolio would be comprised of more aggressive investments than a child who will be attending college next year. “The beauty of these portfolios is that once you start investing in that portfolio, you don’t have to worry about reallocating assets because it does it for you gradually as your child ages,” Troutman says.
For Raquel Granahan, VP of wealth management at OppenheimerFunds, the popularity of advisor-sold plans versus direct-sold ones varies among states. For instance, Oppenheimer’s direct-sold Oregon College Savings Plan is “extremely popular” among investors in Oregon because they are “highly educated and Web-savvy,” Granahan claims. Oregonians also like the direct-sold plan because they can enroll online, she says. Oppenheimer has increased the number of “new sellers” for its advisor-sold plans, Scholar’sEdge, sponsored by New Mexico, as well as the Oppenheimer 529 Plan, sponsored by Oregon. Granahan admits that Oppenheimer was a late entrant to the 529 market–launching its first plan in 2000–but “financial advisors in the 529 business are giving Oppenheimer a chance and a second look,” she says. Total assets in all four plans–including The Education Plan, which is direct-sold and sponsored by Oregon–are $1 billion.
On the horizon at Oppenheimer is an “affinity program” for 529 plans, in which new investment options will offer “benefits to investing in one 529 plan versus another,” Granahan says.
Prepaid 529 plans still lag their savings plan counterparts in assets. As of the first quarter of 2005, prepaid plans held $12.7 billion in assets, according to FRC. With prepaid plans, investors purchase a contract and the plan pays a child’s tuition when it’s time for her to go to college. Some prepaid plans are run by the states while others are independently run. But from the vendor’s perspective, Granahan argues that because most state-run prepaid plans are invested “very conservatively,” it’s hard to see how the plans could garner returns that could keep up with skyrocketing college tuition rates. Some states’ college tuition inflation rates, she says, are 10% or 11%. “Can you get that [type of return] in the S&P?” she asks. But unlike most state-run plans, TIAA-CREF’s Independent 529 allows families to “avoid tuition risk” by locking in a set amount of tuition now that’s guaranteed to cover college expenses in the future–no matter how high tuition rates soar, says Patrick Lulley, national products manager at TIAA-CREF. Two hundred and fifty colleges now participate in the Independent 529, and assets in the plan have reached $60 million.
According to The College Board, for the academic year 2004-2005, the average annual cost of attending a four-year public college or university increased 7.8% to $11,354, while the average cost of attending a four-year private institution increased 5.6% to $27,516.
Lawmakers in Washington are acknowledging the importance of 529 plans by introducing bills that would make the federal tax treatment of 529 plan withdrawals permanent. The Economic Growth and Tax Relief Reconciliation Act of 2001 instituted tax-free withdrawals from 529 plans that are used to pay for college expenses. But in 2010, the provision sunsets, and such distributions will no longer be tax-free. Bipartisan bills were introduced in May in the House and Senate that would make tax-free withdrawals from 529 plans permanent. Senators Chuck Grassley (R-Iowa) and Max Baucus (D-Montana) introduced the College 529 Invest Act of 2005 (S. 1112), while Melissa Hart (R-Pennsylvania) and Earl Pomeroy (D-North Dakota) introduced a companion bill called the College 529 Invest in Education Savings for Tomorrow Act of 2005 (H.R. 2386).
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Washington Bureau Chief Melanie Waddell can be reached at [email protected]
Research Editor Liana Roberts can be reached at [email protected]