Trying to create a new niche in the 529 market and garner some of the assets of the hundreds of thousands of charitable organizations around the world, Seligman Advisors has come out with a 529 college savings scholarship account.

Scholarship 529 is not a new product, but a new spin on an existing college savings vehicle that Seligman established in December 2001 in North Carolina, according to Gary Tarpening, senior vice president at J. & W. Seligman. The product takes advantage of a section of the Internal Revenue Code to allow a charity to invest in a 529 college savings scholarship account, which may allow the plan administrator to build a substantial balance. Low balances have been one of the pitfalls of 529s thus far.

Through exemptions entitled to charities, participating charities have a limitless contribution ceiling in these products. The plan also allows the funds within it to be distributed to several scholarship recipients. Entities organized under Section 501(c)(3) and exempt from taxation under 501(a) of the Internal Revenue Code are eligible to establish a 529 scholarship account.

The 529 industry has had its problems, despite growth in the last year. Cerulli Associates of Boston said that the industry grew by 1.6 million new accounts and had a 119% jump in assets in 2002. Cerulli anticipates the industry will grow to $145 billion by 2008, representing a compounded annual growth rate of 40% between 2002 and 2008.

Yet, in spite of the remarkable growth, plan providers have been disappointed by plan participation and low average account balances, which have raised profitability concerns. While there has been steady growth in account sizes, the bear market has caused the balances to come in on the lower end of projections. Average account balances increased 3% to $6,457 in 2002, and nearly two-thirds of accounts have balances of less than $5,000. The low balances often do not cover the administrative and operational costs, making the vehicle a less desirable product for a firm to offer.

Seligman's Scholarship 529 is a way for the firm to boost its 529 account balances since it pools the assets of several scholarship candidates into one account and allows that account to be administered as the charity sees fit.

Larger Balances

"Obviously, we would like to see large individual account sizes, and this would be part of the solution," Tarpening said. He said the opportunity is something the firm is excited about since there are so many charities that provide scholarships to students, it could be a way to significantly grow business. However, Tarpening said this savings account is not ideal for every charity. He said smaller charities, ones that may give out a $1,000 scholarship once a year, for example, may not see a definitive benefit from this plan or exemption in the law. However, it would benefit mid- and large-size charities with significant dollars distributed via scholarships every year, Tarpening said.

One of the main questions Tarpening said he has come up against is why would a charity enroll in a 529 plan when they're already tax exempt. While 529s provide no additional tax benefits to charities that they don't already get, there are several other benefits, Tarpening said. The efficiency of the administration, assignment, distribution and tracking of the awards that are linked to 529s are definite plusses, he explained. "They get targeted asset management," he said.

In addition, recipients of 529 scholarship awards receive additional tax benefits, he said. "In a normal scholarship outside of the 529, only tuition fees and books are exempt, but inside a [scholarship] 529, expenses like room and board are tax exempt as well," he said.

And while Tarpening acknowledged that his firm's product may not be one of a kind, it certainly isn't mainstream in the industry either. He said he has run across this kind of product among individual financial advisers and one wholesaler.

The program has been rolled out gradually and had formally been available for a number of weeks. It is distributed exclusively through financial advisers. And while Seligman does not have any projections for the product yet, it should "see some fairly significant flows based on the early reception it has received," Tarpening predicted.

"It's something not many financial advisers have taken advantage of yet. We're getting a very excited reception to this," he said.

Copyright 2003 Thomson Media Inc. All Rights Reserved.

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