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Portfolio > Asset Managers

529 Plan Assets Up, But New Accounts Are Down

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Assets in 529 college savings plans rose to an estimated $68.4 billion at the end of 2005′s fourth quarter, an increase of 31% from the fourth quarter 2004 total of $52.3 billion, according to a study by the Financial Research Corp. for the College Savings Foundation, Washington.

But in a sign that growth in plans may have peaked, the total number of new 529 accounts dropped from the year before, the study finds.

The quarterly asset total was up 7.9% from an estimated $63.4 billion at the end of the third quarter, CSF reports.

The 529 college savings plans, which are named after the Internal Revenue Code section that authorizes them, give federal income tax-free treatment to earnings and distributions from the accounts for qualified college costs. Many states sponsoring the plans also offer tax-free treatment to residents, and one state, Maine, also offers tax-free earnings and distributions to nonresidents.

Estimated net sales, or new contributions, for the fourth quarter totaled $4.1 billion, up from $3.2 billion in the third quarter but down from $4.6 billion in 2004′s fourth quarter, CSF reports.

New dollars for the year were at about $13.7 billion.

Growth of new accounts is flattening because Congress has not made 529 plan provisions permanent, notes David Pearlman, senior vice president and deputy general counsel of Fidelity Investments, Boston, who is chairman of CSF. If Congress doesn’t renew the provisions, they will expire in 2010.

“Until last year, we were seeing 40% to 50% growth rates,” Pearlman says. “Last year, new accounts were up only 15%.”

CSF is working hard to make the 529 plan tax exemption permanent, he says. One bill backed by the foundation in the U.S. House has 120 sponsors, while a similar bill in the Senate has 65, Pearlman reports.

“That’s a No. 1 priority for the 529 college savings industry,” he says.

The study compiled data from CSF member companies holding a total of more than $24 billion in 529 plan assets, or about 35% of the $68.4 billion total assets in such plans.

Among plans included in the study, age-based portfolios represented 69% of total assets in the fourth quarter, followed by fixed portfolios at 25%. Individual fund portfolios represented 6% of assets.

An age-based portfolio shifts its asset mix toward more conservative investments as the beneficiary nears the start of college. In a static portfolio, the allocation remains fixed.

Age-based portfolio assets increased almost 9% during the quarter to 69% of total 529 plan assets. Static portfolios accounted for 25%, while individual funds, which were the slowest growing portfolio option over the 12-month period, held 6% of total assets.

The remainder of assets were held in other instruments, such as savings accounts.

Of the $24.2 billion in assets represented in the survey, more than 39% was held in no-load portfolios, which produced $367.5 million in net sales during the quarter.

The remaining broker-sold shares accounted for about 61% of assets, with front- and level-load shares accounting for 53% of total portfolio AUM.

In looking at the breakdown of assets and net sales by asset allocation, investment mixes were heavily equity-oriented, CSF finds. About 70% of portfolios had more than half of assets invested in equities.


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