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529 Plans Get More Conservative as College Approaches

As individuals investing in 529 college savings plans draw nearer to entering college, their investment tastes become more conservative, according to recent research from the College Savings Foundation.

CSF, a not-for-profit Washington-based organization representing the 529 industry, said firms surveyed indicated age-based portfolios were overwhelmingly the most popular selection among investors in their plans. An age-based portfolio is a fund-of-funds that takes on less risk and is more conservative as the account beneficiary approaches college. More than 66% of assets represented in the survey, or $10.6 billion, were in age-based portfolios.

Bill Burrow, senior vice president of CSF and chairman of the group's data committee, said the results highlight the importance of asset allocation and diversification in the plans. It is especially true, he said, in light of the fact that participants are allowed only one transfer per year.

Static portfolios, funds-of-funds where a diversified allocation remains fixed, came in second with $4.1 billion in assets, representing 26% of the assets among those surveyed. Lastly, individual fund investments comprised 8%, totaling $1.3 billion in assets. Burrow said that the individual fund offerings in the 529 plans are more recent, but despite the launch of the individual product originally by a non-CSF member, assets in both static and age-based funds-of-funds have remained strong.

Selling the products so far has largely remained in the brokers' hands. Almost 60%, or $9.6 billion in assets of those surveyed, were purchased through brokers. Therefore, only 40%, or $6.5 billion of assets in the survey, contained no loads.

Burrow said the heavy leaning toward adviser-sold, load-bearing portfolios is "just based off the demographics of who is a College Savings Foundation member. If you were to put in the complete marketplace of 529 plans, you would note that the percentage of business done through a financial adviser is higher than that percentage. That's really a reflection of how challenging and how difficult a task it is to save for college. Investors understand that they need the help of a financial adviser."

Heavily equity-oriented investment mixes were by far the most popular combination. More than half, of 55.4% of respondents' assets, for a total of $6.5 billion, had a mix leaning more heavily toward equity than fixed income. Of this $6.5 billion, 10.8% of the assets were in portfolios with a 60/40 ratio in favor of stock over bond funds, while 1.2% of the assets were in ones with a 70/30 weight. Those with an 80/20 mix made up 13.2%, and a 90/10 ratio carried 16.7% of the assets. Assets in holdings with all stocks and no bonds made up13.5%. A mere 8.4% of assets preferred an even split between equities and fixed income, and only 5% of the assets represented in the survey are 100% invested in fixed income.

Burrow said the obvious tilt toward equity is directly attributable to the difficulty a large number of Americans are having keeping up with the rising costs of college. To make up for this, investments in the more aggressive equities rather than bonds seem the way to go. In fact, The College Board of Washington reports that the average college tuition increase, while smaller than last year's, remains at an historically high level. Four-year private institutions are charging an average of $27,516 a year, up 5.6% from the $26,057 imposed on students last year. Despite efforts to provide more financial aid to students, loans are outpacing grant aid for the second year in a row.

"It's very clear that investors and advisers understand how significantly the costs of college have risen over the past few years and are anticipated to continue to rise," Burrow said. "So, to be able to reach their college savings goals, they are going to need some kind of an equity position to get them where they need to go."

The industry, which had struggled to gain assets in the past, picked up steam in the second quarter this year, according to data from Financial Research Corp. in Boston. Assets in the industry rose 7% from the first quarter of this year and 66% from the year-ago period. The $7 billion in net sales during the first half of this year also represents a 45% increase when compared to the first six months of 2003.

The College Savings Foundation's survey results are based on data provided by members, including: AIM Investments, Alliance Capital, American Century, Delaware Investments, Enterprise Capital Management, Fidelity Investments, Franklin Templeton, Manulife Financial, Merrill Lynch, Morgan Stanley, Oppenheimer Funds, State Farm, Strong Financial and T. Rowe Price.