There is more room on the 529 bandwagon than it first appeared. State-sponsored "529" college savings plans have been popping up all over the country recently. Currently, 36 states offer active plans, and almost all of the remaining states have agreements with investment companies or are taking proposals for their plans. Still, fund companies that do not sponsor a 529 plan do not necessarily have to miss out on that market. States are increasingly looking for partners to join existing plans and add their funds, according to industry observers.
For example, AIM Management Group does not sponsor a 529 plan on its own, but has partnered with plans domiciled in Maine and Alaska in an effort to gain assets from that segment of the market, according to a company spokesman. Similarly American Express Asset Management Group has partnered with the Wisconsin plan and Manulife Financial has partnered with the Alaska plan, said Joseph Hurley, CEO of SavingforCollege.com, LLC of Pittsford, NY.
529 Plans Get Marketing
Push From Tax Break
Although 529 plans have been available for three years, they have garnered increased attention recently thanks to the tax package signed by President Bush and passed by Congress this June. Effective January 1, 2002, earnings from 529 plans will be tax-free when withdrawn to pay for qualified education expenses. Also, account owners will be able to switch from one plan to another once every 12 months.
When Fidelity Investments announced the launch of its 529 plan in New Hampshire at the end of July, 529 plan assets totaled $2.5 billion, and the firm predicted that they would reach $10 billion by the end of the year. Ellyn McColgan, president of Fidelity Investments Institutional Services Company, said that 529 plans have the potential to become for college savings what 401(k) plans have become for retirement savings.
Last week, Bob Taft, governor of Ohio, together with the Ohio Tuition Trust Authority, declared September 2001 College Savings Month in conjunction with National College Savings Month sponsored by the College Savings Plans Network of the National Association of State Treasurers. Ohio's Tuition Trust is also launching a new marketing campaign to promote college saving, and specifically the state's 529 plan, which is administered by Putnam Investments.
529 Market Following
Sub-Advisor Distribution Model
When 529 plans were first developed, there was a rush for investment companies to sponsor plans since there were a limited number of states from which a plan could originate, said Hurley. While companies are still vying to be the sponsors in the remaining states, others have realized that they can get their hands on some of the 529 assets without having to administer the plans themselves, he said. "There's definitely active competition in the remaining states since there's only a few that don't have commitments already," he said. "But one thing we're starting to see a lot of is companies partnering with existing program managers."
States want to attract 529 assets because they get a portion of the management fees and are increasingly looking to offer plans with multiple investment offerings and distribution channels, according to Hurley. Last week, Strong Capital Management, which sponsors 529 plans in Oregon and Wisconsin, said that it had come to an agreement with the State of Nevada to administer a 529 plan there. However, Nevada has already enlisted three additional asset management partners for the plan.
A Growing Trend
"This is a trend in the industry that we're seeing now," said Raymond Loewe, president of College Money, a college savings consultant for financial planners. "If you sell a variable annuity, usually within the product these days, you'll have six or seven mutual fund companies operating different parts of the annuity." The same is going on with 529 plans now, he said. And although 529 plans are not the ideal vehicle for less wealthy investors because the money coming out of the plans will likely count against financial aid packages, 529s are still going to be the dominant college savings investment product. "It's big business," he said.
One problem with 529 plans now is that they are legislated differently in each state, according to Loewe. Each plan has different asset allocations and contribution limits, and a standard is unlikely anytime soon. In a few years, private institutions such as universities will be allowed to sponsor their own 529 plans, which will only increase the number and complexity of plans, he said. Still, the fact that they will not be limited to state sponsors might open up the market for firms who don't get in on it now.
It can be easier for a firm to sign on as a partner to a plan as opposed to being the official sponsor, as the selection process for sponsors is fairly strict, according to Sarah Henriksen, manager of college planning at Strong. It is usually the state treasurer's office that sets up a committee to review the proposals and outline the criteria by which the potential sponsors are judged. Among the things the committees consider are a firm's investment management, marketing and distribution capabilities, and administrative services, Henriksen said.
"The administering of these products can be extremely complex, and I think it's much more challenging than a lot of firms that want a piece of the market realize," said Brian Krolicki, Nevada State Treasurer. Krolicki's office was in serious discussions with over a dozen investment managers regarding administering its 529 plan until Strong won the mandate. "Having multiple managers was not just attractive, it was mandatory," he said. "And I think some firms will be better served by partnering with a plan instead of having to run the whole thing."
While that may be the case, it is clearly more advantageous to be the sponsor as opposed to a partner, Hurley said. "It's easier to be the partner, but if you run the plan yourself you get the full program management fee and you also get a piece of the fees from the action that you license out." The percentage that the partnering firm pays to the sponsor is negotiated individually and differs in each case.
Other Alternatives
While 529 plans look like they will be the dominant vehicle for college savings, education IRA plans, now called education savings accounts, will also be widely used and offer companies that don't get in on the 529 wave an alternative into that market, said Hurley. Next year, maximum contributions into education saving accounts will be increased to $2000 and unlike with 529 plan assets, they can be used not only for college, but for private education from kindergarten through 12th grade, he said. "Also, unlike 529 plans [which require state sponsorship], education IRAs can be offered by pretty much anybody, so you're going to see a lot of different choices there," he said. "I think they'll see big growth as well."
