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529 Assets Poised for Tremendous Growth


NEW YORK - Section 529 plans, with $10 billion in assets at the end of 2001, could reach $100 billion by 2005 and more than $380 billion by 2010, according to estimates from Financial Research Corp. (FRC) of Boston.

Although 529s remain the least-used college savings vehicle, growing awareness about them is about to change that, according to a new survey by Aegon International Markets of Louisville, Ky. Aegon released findings of its survey at the 2002 College Savings Plan Summit here late last month, sponsored by Financial Research Associates of Santa Cruz, Calif.

In 2001, only 8% of parents had read or heard about 529 plans, but that has grown to 16% this year, according to Aegon.

Less than 5% of the parents Aegon polled nationwide who are currently saving for college are using 529s, according to Aegon. Bank savings accounts top the list at just over 60%. Mutual funds are the second-most popular college savings vehicles, with usage around 44%, followed by U.S. Savings Bonds, stocks, CDs, money market accounts, education IRAs and corporate bonds.

For 529 assets to grow to $100 billion by 2005, parents will have to withdraw money from other savings vehicles, most likely bank savings accounts, said Whitney Dow, FRC director of educational savings research. He added that because this is a convenient time to do tax-loss selling, mutual funds and individual stocks would also be likely sources. In fact, with $13.8 billion in net outflows from equity funds in June, according to Lipper of New York, some of that probably went to 529s, said James Johnston, president of Sage Scholars of Philadelphia.

But Fidelity Investments of Boston is finding that many parents are beginning to make regular contributions to 529 plans, said Eric Nottenson, vice president of college planning at Fidelity. Between 65% and 70% of Fidelity's 529 participants contribute regularly, he said.

One of the recent developments contributing to 529 growth is the evolution of multi-manager programs, according to Dow. Although only one firm wins the state mandate to administer the plan, outside investment firms can align with the program sponsor and offer their own products in the plan, or help with distribution.

"There was a perception not that long ago that we would see just 50 plans," Dow said. "Although holding a state mandate is a powerful position, with the evolution of multi-manager programs, there are big opportunities for affiliated distribution."

In fact, the business model behind Schoolhouse Capital, the college savings subsidiary of State Street Corp. of Boston, is to win 529 state mandates but partner with other firms for product and distribution, according to Schoolhouse CEO Ralph Constantino. Schoolhouse is the lead manager for 529 plans in four states, but because the firm doesn't have "a strong mutual fund brand or distribution," it has partnered with other firms in those four states to help with marketing and sales, Constantino said.

Another recent 529 development has been the addition of individual fund offerings and alternative asset portfolios to plans. Originally, 529s offered only pre-constructed portfolios, but as 529s grew, intermediaries began clamoring for more flexibility, and some firms, including American Funds of Los Angeles, Alliance Capital Management of New York and Putnam Investments of Boston, responded by offering individual funds in addition to the existing portfolios. Although that is something that intermediaries wanted, it could be cause for alarm if investors use the flexibility to be inappropriately risky with their college savings, said F. Jeffrey Van Orden, managing director of investment consulting at Milliman USA of Seattle.

Still, age-based, pre-constructed portfolios are the most commonly used structure within 529s. Roughly 50% of participants use age-based portfolios and about 30% use static portfolios, so less than a quarter of them use a portfolio consisting of stand- alone funds, Dow said.

"We believe that age-based portfolios are still going to garner the lion's share of assets," Constantino said. "Most intermediaries are not going to want to construct a portfolio that they'll have to constantly revisit."

Although parents are more risk-averse with regard to college savings versus retirement savings, many still have grossly unrealistic expectations for returns, said Lynn Allen, director of public markets at Aegon. About 83% of parents said they would never do anything to risk accumulated principal, and 85% said that some investments are too risky for college funds regardless of potential returns, according to Aegon. But parents expect an annual average return of 19% on college investments, down only 5% from 2001, according to Aegon.