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The Rise of the Company 529


Firms are finding that corporate 529s, company-based college-savings funds, offer a recruiting tool for the prospective employee who has everything. They're proving a boon for advisers, too.

Defined contribution 401(k) plans have driven that investment vehicle's success, and now, companies are beginning to offer 529s.

"They're growing rapidly," said Bruce Harrington, vice president of product development at MFS Investment Management in Boston. "Almost every day of the week, I get a call from a client who wants information on the subject," as employers view 529 investing as yet another benefit they can offer employees, Harrington said. And employees are clamoring for them, particularly since it's so easy to save for college via payroll deductions.

Assets in 529s now top $25 billion nationwide in three million accounts. Corporate accounts only comprise $750 million, or 3% of the assets, and 150,000 accounts, or 5% of the total. But by 2008, both of those numbers are expected to increase by more than 75%. Wells Fargo and Bank of America are among the financial institutions offering corporate 529 plans. OppenheimerFunds and Schoolhouse Capital, a subsidiary of State Street, in February launched a 529 college-savings plan with an A-share offering specifically designed for corporate clients who wish to offer the plan to employees without the added administration or expense of a payroll deduction plan.

MFS Investment Management, which has more than $123 billion in assets under management, introduced its own 529 plan in August, even though it has been a long-time participant within other 529 plans as a fund offering. MFS chose to build its program on the state of Oregon's model, which the firm found to be progressive, Harrington said. In conjunction with Oregon, MFS offers 25 different funds, all of them its own. MFS also acts as asset manager and fund administrator of the plan.

"Companies that are choosing to add additional benefits for their employees are finding that 529s can be a good incentive," Harrington said. "For one reason, there's no federal requirement that the corporate match has to be the same for every employee," and some companies might want to use college savings matches as an incentive to hiring top executives, he said. Unlike a 401(k), which requires the corporate match to be the same across all employees, the company match for executives can be more than lower-level employees.

Harrington admitted that administering corporate 529s "can be cumbersome," since 23 states now have a 529 tax deduction, but most firms with branches outside their home state just offer one option - and do not expect the investment firm but they themselves or their employees to figure out taxes.

"If you're a corporation with employees in multiple states, you need to do some due diligence to know the rules of each state," Harrington said. "It's not feasible to have 50 different products. In our literature, we remind employees that there are certain tax benefits depending on where they live."

And while each 401(k) plan can cost a firm $25 to $50 to administer, there's no cost to set up 529s. Moreover, MFS waives its load for groups, which can purchase at the net asset value level.

PNC Bank has been at the forefront of the push to encourage companies to create corporate 529s. According to John Randall, manager of third-party products for the regional community bank unit, the bank's workplace banking unit is where most of the contacts are made. The company executive is then referred to a bank rep at PNC Investments to set up an account.

"Banks have been playing in the commercial arena for a long time, and PNC has clearly demonstrated strong successes in the workplace channel," he said. "In this channel, it's important to have a competitive sweep of products and solutions." Randall declined to detail the number of corporate 529s or the total sum of assets in these accounts at PNC.

PNC Investments offers a variety of 529 plans, including American Funds in its Virginia plan, funds from Putnam Investments in its Ohio plan, funds from Delaware Investments in its Pennsylvania plan, and funds from Fidelity Investments in its New Hampshire plan.

The bank is now weighing whether to add Franklin Templeton funds under the New Jersey plan. "It's still a new area, so there's definitely opportunity," Randall said.

Interest in both corporate and individual 529s has stalled recently, Randall said, due to President Bush's proposed lifetime savings accounts, retirement savings accounts and employer retirement savings accounts, which are part of his controversial tax-cut plan.

"Last year, we saw quite a bit of growth in 529s, but people are wondering down the road what the impact might be if President Bush's tax plan goes through," he said.

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