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529 Plan Stakes Rise as do Changes, Asset Projections


New York -- The stakes are definitely higher today for all of those involved in sponsoring, managing and distributing tax-favored 529 college savings plans. That was the consensus among a panel of experts and members of the recently formed not-for-profit College Savings Foundation (CSF) here in New York at a media conference earlier this month.

The College Savings Foundation, which was formally organized in May 2003 but began efforts in earnest just a few months ago, is a Washington-based central repository for 529 plan information and works to help families understand the benefits of college savings plans. The organization also serves as a discussion forum for college savings industry participants, and as a lobbying group that works with both policy makers and the media, said Chuck Toth, education savings manager with Merrill Lynch, and chairman of the College Savings Foundation. "We formed this organization in recognition of the growth potential of this sector," he added. A total of 14 investment management companies now count themselves as members of the CSF, including Fidelity Investments, T. Rowe Price and Franklin Templeton.

New statistics on the total assets held in Section 529 plans show that 2003 closed out the year with a total of more than $35 billion across the spectrum of 82 college savings plans. From 2000 to 2003 these plans grew at a compounded annual rate of more than 141%, according to Financial Research Corporation (FRC) of Boston. Newly revised growth projections, based on both existing and new assets seeping into 529 plans, call for these plans to push well past the $50 billion mark by year-end 2004, $100 billion by 2006, and to reach $300 billion by 2010, according to FRC.

Original industry estimates proffered by Cerulli Associates, also of Boston, called for $51 billion to be invested under these plans by 2006. These new estimates by FRC would surpass those earlier estimates by almost two full years.

"529 plans are really being embraced by a large economic spectrum," said Whitney Dow director of educational savings research for FRC. "People are starting to realize that they need to aggressively save to meet that burden."

Not only is asset growth being fueled by college costs that are rising much faster than wage inflation, but more and more grandparents have a real sense of leaving an education legacy, Toth said. In addition, the "average" student is changing.

"We're starting to see a trend with non-traditional students," Toth said. Many career professionals, for example, who have hit a ceiling are going back to school for retraining or further education, he added.

But while assets finding their way into 529 plans are growing, there are still obstacles ahead, agreed the panel of experts.

Challenges Abound

Although college savings plans are beginning to make inroads, right now an estimated 93% to 95% of savers are still tucking future tuition dollars into other types of savings plans, including Coverdell plans and Uniform Gift to Minor Act accounts, noted Toth.

Moreover, these plans are sold, not bought, said David DiOrio, vp, director education strategies at Morgan Stanley. About 80% of the 529 plans now available are advisor-sold, he said. Not only has saving for their children's college education become one of the three top client goals (along with saving for a home and saving for retirement) but the need to choose the right plan has led many to seek the advice of advisors. Yet, only one in four financial advisors sells college savings plans to their clients. Many advisors feel hamstrung by the complexity of plans and features available, concerns over the suitability for each individual client's situation, and time constraints, DiOrio noted.

In addition, there are challenges facing state treasurers who may face mounting political exposure over the current structure and management of their state's 529 college savings plan, said William Raynor, first VP, director of education savings and sales at AIM Investments. State treasurers and legislators want to be sure to offer enough choice under the plan so as to dodge any future bullets, he added. Limitations, even those well-intentioned, could spell someone's political death, DiOrio said.

For example, some of these tuition savings plans were stung by the mutual fund scandal when sole investment managers who were managing a state-run plan were implicated, noted the panelists.

Furthermore, the once bright promise of having employers offer college savings plans to employees through payroll-deduction plans has largely fizzled, said the panelists. Studies show that only two percent of 529 plan contributions came through employers, Raynor said. "The employer market is a lot of show, and no go," he said.

Benefit managers, intent on cost-cutting measures, were not anxious to add college savings plan administration to their agendas. Also, with many employees increasingly having employers in multiple states, a question as to which state plan was the most suitable across the board was an issue, Raynor added.

Changes on the Horizon

The fallout from the mutual fund scandal will likely be that many 529 plans will offer multiple managers and move toward a best-of-breed approach, agreed the experts, and some states will likely offer different variations of plans in much the way that Nebraska now has a choice of different silo programs that it offers, noted Dow of FRC.

Also watch for changes to Federal and state tax laws, said the experts. While the current law governing tax-free deductions within 529 plans has a sunset provision, which would end this tax-favored status by January 2011, there are now five separate bills in Congress, all aimed at making those permanent, Raynor said. In addition, many states are looking to back tax equalization provisions, which would make investments to any state-sponsored tax deductible no matter where the donor resides, he added. In the past year, a handful of states have moved toward adopting tax equalization, Raynor explained.

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