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529 Plan Assets Leap and Accounts Nearly Double in 2002

Despite 1.6 million new accounts and a growth rate of 119% in assets in 529 college savings plans in 2002, providers have been disappointed at the individual plan size, according to a recent report by Cerulli Associates of Boston.

Plans added more than $10 billion in new contributions in the year to close out 2002 with $20 billion in assets, the start of what Cerulli anticipates will be a period of rapid growth. The Boston-based research firm predicts savings plan assets will grow to $145 billion by 2008, representing a compounded annual growth rate of 40% between 2002 and 2008. There were 3.1 million 529 savings accounts at year's end, according to the study, "A Competitive Outlook for 529 Savings Plans."

Even in the face of this remarkable growth, low average account balances have raised profitability concerns among providers. The average account balance increased a moderate 3%, from $6,281 to $6,457 in 2002. Average account sizes have been steadily growing over the last few years, but the sluggish bear market and difficult economic times have led contributions in the plans to come in on the lower end of expectations. These low balances often do not cover administrative and operational costs. Additionally, marketing commitments by providers with sponsoring states also are hurting the bottom line.

Nearly 2/3 of total accounts have a balance of less than $5,000 and 26% have balances of between $5,000 and $20,000.

A mere 2% exceeded $50,001, with the remaining 6% falling between $20,001 and $50,000.

Even with the rapid growth in asset size overall, the report suggests assets in 529 plans will remain concentrated among the top programs, making profitability for many extremely difficult. More than 70 plans exist in 49 states and the District of Columbia. But, despite a rise in competition for assets, the top 10 providers control 82% of assets, leaving the more than 25 remaining providers to divvy up the 18% that is left. A mere seven providers ended 2002 with more than $1 billion in assets.

TIAA-CREF has the largest number of state mandates and has the largest asset base of $3.1 billion as of the end of 2002. Alliance Capital, the program manager for Rhode Island, stands in second with $2.6 billion, and Fidelity checked in at third with $2.3 billion.

Room For Improvement

Penetration rates remain low, which is both good news and bad news for providers. While the plans have not caught on across the board, the low rates means there is plenty of room for growth. Penetration rates of 529 plans for children under 18 at the end of 2002 was a measly 4.3%, while overall awareness of the plans continued to stay low. That, combined with rising tuition rates and a large number of firms and states marketing the plans, suggests room for growth and a need for the plans. However, the growth will force some firms to reconsider their involvement with the plans.

The difference between the amount actually saved by the average household and the rise in tuition costs continues to widen, which is another concern. Tuition rates at public schools increased 9.6% in for the 2002-03 year, while they jumped 5.5% for private schools. The average cost for tuition and fees at a four-year public college grew to $4,081 for the year, while a private college education charged an average of $18,273 for the year.

In 2002, providers that started corporate plans were seeing participation rates of less than 5%, significantly below that of 401(k) retirement plans. And although that number is expected to rise over time, it still represents less than 2% of total assets as of the end of 2002, Cerulli estimates.

Another concern among plan providers is the possible passage of Lifetime Savings Accounts, which many believe would significantly hurt the future growth of 529s. Assets in 529 accounts are not easily accessible and many investors like to have that option in case of an emergency. College 529 savings plans penalize investors for nonqualified distributions, and the assets are not readily accessible.

In 2002, 2/3 of new assets into 529s were generated through advisor-sold programs, a significant departure from the direct-sold distribution method popular a few years ago. But, even though the intermediary channel has overtaken it, the direct-sold method is still a critical channel. Every state has or soon will have a 529 plan, and each will have at least one low priced direct-sold option available.

Copyright 2003 Thomson Media Inc. All Rights Reserved.