As students prepare for their college board exams, here is an analogy that isn't found in a Princeton Review manual but probably is a college prerequisite:

Retirement savings is to 401(k) plans as:
College savings: prepaid plans
College savings: college IRAs
College savings: 529 savings plans
College savings: savings accounts

Financial advisers are telling customers that, whether their children are studying for the SATs or learning their ABC's, the right answer for college savings is 529 plans. And with the plans' popularity burgeoning since Congress made them tax-exempt in last spring's tax law, instead of just tax-deferred, customers are responding in droves, and financial institutions are moving to create and distribute the product.

Ralph J. Constantino, chief executive officer of Schoolhouse Capital, the college savings unit at State Street Corp., said the 529 plan is still in its infancy but is already a very hot product for banks.

"In only the past year, the really big distributors and really big banks have begun offering the 529 plan. This is a product that is absolutely poised for more growth," he said. (TIAA-CREF, the biggest 529 plan manager, had 51% growth in its plans' assets under management from autumn 2000 through this fall.)

Schoolhouse Capital runs the 529 plan in New Mexico. Its plan lets investors save as much as $202,225 in a single account for a child or grandchild to attend college anywhere in the United States. And people outside New Mexico can buy the product from Schoolhouse.

"The 529 plan is becoming the fund that everyone must have," Mr. Constantino said. "The way the IRA and 401(k) are ingrained with the conservative bank investor is the way that that the 529 plan is becoming."

Section 529 college savings plans, named for a section number in the federal tax code, have offered tax deferments since their inception in 1997. But beginning Jan. 1, the plans will be tax-exempt, heating up their appeal. The state-administered plans let people save more than they could in a typical College IRA and with more freedom than is offered by most prepaid college savings plans.

"These [529] plans have gone from being an attractive product to being the product," said Michael Murray, national markets director of mutual funds at American Skandia. "It is almost negligent if you are saving for college and you are not using this as your savings vehicle. And it is almost criminal if you are a bank and you aren't offering it."

American Skandia only launched its 529 plan, in Nevada, on Dec. 10, but already most of its major banking clients have signed on to distribute the product, Mr. Murray said last week.

"This just looks and smells like the annuity market of 10 years ago," Mr. Murray said. "This is the product everyone wants."

All told, $10 billion has been saved in college savings plans, according to, a Rochester, N.Y., Web site, but Joseph Hurley, the site's founder, said he expects this to grow "into the trillions" in the coming years, and financial institutions are preparing for a rush.

Advisers and plan sponsors say the reason for the astounding growth prospect is simple - a 529 plan is a unique college savings vehicle with extensive investment options and low minimum investment requirements that can also be a tax shelter or an estate-planning tool.

"The beauty of this product is, when you are selling it to investors, you never have to talk about performance," said Dick Davies, an executive vice president at Alliance Capital. "Customers want to talk about financial planning and saving for their children's future. Saving for your children is a parent's second priority in terms of long-term savings, and after talking to us, they realize, this is a product they have grossly underestimated how much they need it."

New York-based Alliance Capital began selling 529 plans in October 2000 when it agreed to manage Rhode Island's flexible college savings plan. Rhode Island, like most states, had had a prepaid tuition plan in effect since the mid-'80s. The prepaid plan had accumulated $8 million of assets in Rhode Island in 14 years. From October 2000 till this March, with investors nationwide entitled to buy it, the Alliance Capital CollegeBoundfund program accumulated $170 million of assets. Now it manages $692 million of assets nationally.

"We have had tremendous reception to our product since we launched it, and that is because there is really a great cultural fit to this kind of product both in Rhode Island and across the country," Mr. Davies said.

In October, Alliance became the 13th financial company to begin managing a 529 plan for a state. Unlike prepaid college savings plans, the 529 plan can be used to fund the expenses of children who attend out-of-state colleges and universities, and it can be used by people who don't live or work in the state sponsoring the program.

"529 plans are exploding," said Stephen Mitchell, senior vice president at Fidelity Personal Investing and manager of its college savings plans. "They may have been in effect for the past four years, but really they are just now becoming less of a secret. This is forcing more institutions to stand up and take notice."

Mr. Mitchell, whose 529 plans have grown from $687.7 million of assets in October 2000 to $945.5 million on this Dec. 1, said that, beyond tax advantages to the investor, the plans give institutions like Fidelity another "cornerstone product" that differentiates it from the competition.

"People that come to us for retirement savings also want to be able to save for their children's futures or their future children's futures," he said. "It is crucial to have any product the customer is looking for."

The difference between 529 plans and 401(k) plans, besides the fact that 529 plan withdrawals will no longer be done pretax, is that the number of providers is limited. Each state must select one company to distribute its 529 plan.

Of the 50 states, 36 offer 529 plans. Ten states, plus the District of Columbia, are developing such plans. Four states with prepaid plans are not developing 529 programs.

TIAA-CREF, a New York-based annuity and retirement fund provider for educators, is the largest 529 plan manager, with $1.16 billion of assets under management. Unlike Alliance, Putnam, and State Street, which each manage one state plan (but can distribute it nationwide), TIAA-CREF manages plans in several states: California, Connecticut, Idaho, Kentucky, Michigan, Minnesota, Missouri, New York, Oklahoma, South Carolina, and Tennessee.

Timothy Lane, the vice president of tuition financing at TIAA-CREF, said his fund has had rapid and massive growth in the 529 program. He said assets under management grew 50.7% in a little over a year - from Nov. 15, 2000, when it had $730 million, until this Dec. 1.

Mr. Lane said the next step in the 529 marketplace will be consolidation. Many banks and financial institutions that want to offer the product will have to find partners in order to enter the market, he said.

"You will see more and more companies start to look at this product as a good business for them to be in," he said, "and I think the trend will be toward partnerships and consolidation. We think we have a lot of products in a lot of states, and this will allow us to be a real leader in a vibrant market."

Jenny Engle, a spokeswoman for Fidelity, said the heavy demand for 529 plans is clearly because of the new tax exemption.

Fidelity, which manages 529 plans in Delaware, Massachusetts, and New Hampshire, announced plans Wednesday to launch the Fidelity Workplace 529 College Investing Program, its third 529 savings plan and the first available through payroll deductions. The new program, which will begin being sold in early 2002, lets investors have funds deducted from their paychecks and placed directly in a 529 plan.

"We expect that, by enabling workers to use direct deposits to save in 529 plans, these plans will become as popular for college savings as 401(k)s are for retirement savings," said Kathryn Hopkins, executive vice president, Fidelity Institutional Retirement Services Co.

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