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Strong 529s Offer Systematic Exchange Program


Struggling to maintain profitability in 529 plans and facing low general public awareness about the products, firms are increasingly adding features and catering to the needs of the high-net-worth client, hoping to snag the bigger fishes in the investment pond.

Accordingly, Strong Financial Corp. will begin offering a systematic exchange program, also known as dollar cost averaging, on its 529 plans in an attempt to make the product more attractive to wealthy clients.

"It definitely is a feature that is going to appeal to folks that have larger account balances," said Sarah Henriksen, director of education planning at Strong, headquartered in Milwaukee. "We were getting a lot of requests for this type of feature both through investors and financial advisers," she said.

The systematic exchange program allows investors to move money from one investment option to another at regular intervals. Basically, it gives investors the option to put money where they feel most comfortable, instead of locking them into lumping all their money in the same place. It adds a layer of investment flexibility, Strong says, that will enable investors to dollar cost-average into another investment option on a regular basis while still complying with the annual investment change rule. This rule locks investors into making fund choices only once a year, so this provides welcome flexibility.

For example, if an investor is still not convinced that the market has turned itself around quite yet, Strong's 529 allows them to invest a lump sum in a conservative investment and then systematically move that money over to a riskier, equity investment. However, the plan allows investors to move between nearly any portfolio, not just conservative to aggressive, and provides the ability to move back and forth from fixed to age-based options. It has a low minimum transaction amount, according to Strong, and has the ability to exchange from a no-load into an advisor-sold share class.

Strong also said this is a good way for the rich to take advantage of 529 investors' ability to contribute $55,000 to a plan in one year, prorating it over a five year period, without triggering a gift tax. The federal government's gifting allowance is $11,000 a year, but 529s are allowed to gift five years worth at once, for a total of $55,000, which has become a selling point of providers.

"Adding systematic exchanges to that contribution can be an attractive approach for combined college-savings and estate-planning strategies, because you can get the entire amount growing tax-free and without gift taxes, while not having to dive head-first into the market right away," Henriksen said.

Investors' wariness of getting back into the market, combined with requests for the service led to the Strong offering. The firm manages seven plans in total, two of which are sold as no-loads, two sold as financial adviser products and the others through advisers and direct sales. The firm has plans in Nevada, Oregon and Wisconsin and has just over $1 billion in assets between them.

Strong plans on promoting the feature through e-mails to investors and individuals who have requested information on the program but have not yet opened an account. They have added a dollar-cost calculator on the Web site, a place where the firm said it will promote the feature quite a bit. They are also looking into placing inserts into periodic statements provided to shareholders.

Strong is not the only firm shooting for the stars. MFS Investment Management of Boston said recently it has some specific 529 initiatives targeting the rich, which make up only 5% to 7% of the firm's overall accounts, but comprise nearly 20% of its total assets under management (see MME 8/4/03). MFS would like to increase that number to the 30% to 35% range.

The reason firms are swinging for the fences is because despite winning some battles, providers are far from winning the war when it comes to getting acceptance of 529 plans in Main Street America. Assets in 529s are growing at a rapid pace, but account balances still remain low, at an average of $6,400 per account at the end of last year, according to the Investment Company Institute. Assets in 529 plans jumped by $10 billion last year, reaching $18.5 billion by the end of 2002, the ICI said. They seem to be continuing the upward trend this year as well, as assets reached nearly $26 billion at the close of the second quarter, according to Financial Research Corp.

A report by AllianceBernstein Investment Research and Management showed that awareness of 529 college savings plans is still low, with 64% of parents and 65% of grandparents polled unfamiliar with the vehicle. Meanwhile, a mere 14% currently invest in or plan to invest in a 529 plan. That represents a two-percentage point increase from last year's study.

Richard A. Davies, executive vice president and head of marketing for AllianceBernstein said he is surprised that awareness is as low as it is because the product has gotten more mainstream media coverage than any other new consumer savings vehicle.

Copyright 2003 Thomson Media Inc. All Rights Reserved.

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