With most state contracts for 529 college savings programs already awarded to asset managers, states and the managers that run the programs are now vying to offer design and distribution advantages over other state's plans, according to industry observers.

In the past few months, several states have significantly changed their 529 plan options and contribution limits in an effort to make their products more competitive, said Chris Stack, a managing consultant for Saving for College Educational Services, an affiliate of SavingforCollege.com of Pittsford, N.Y.

Because each state regulates its 529 plans differently, each plan is somewhat different in the contribution limits it sets and investment options it offers. In an effort to make their 529 plans more attractive to distributors and investors, several states, including New York and California, are adding a greater range of investment options in their plans, Stack said.

States are eager to attract 529 assets because they get a portion of the management fees.

Most 529 college savings plans offer two different types of savings options: age-based investments and risk-adjusted investments. Age-based plans invest in portfolios of stocks that range in risk. As the beneficiary grows older, the portfolio is re-balanced in less risky securities. In a risk-adjusted portfolio, investors can choose the asset allocation that they prefer, Stack said.

Legislation passed in New York last October allows New York's plan to offer several new investment options including a more aggressive age-based option that offers greater equity exposure as the beneficiary grows older compared to the existing age-based plan. New York will also add a risk adjusted portfolio option with greater equity exposure than existing options, according to SavingforCollege.com, a website that tracks states' 529 plans.

Similarly, last January, California increased the equity exposure for most age groups in the age-based investment option of its Golden State ScholarShare 529 plan, according to SavingforCollege.com.

Besides plan options, states are raising the contribution limits and lowering investment minimums of their 529 plans, Stack said.

As 529 plans gain popularity with investment advisors, states are likely to continue adding more investment options to their plans, he said. The race to offer the most flexible plan is driven by advisors and financial intermediaries who want to offer some measure of customization, he said. The state that offers the most flexible plan with the greatest number of options will attract the most assets, Stack said.

With $3 billion to $5 billion in assets as of March 31, the 529 college savings programs are a small but expanding market, said Joshua Deitch, a consultant with Cerulli Associates of Boston. Growth in the 529 market is steady, if slow, he said.

"It will take time for this market to grow and states are interested in establishing a beachhead and getting people signed," he said. Adding investment options and creating a unique 529 product will be necessary for success, he said.

Financial advisors and intermediaries will play an important part in distribution of 529 plans, Deitch said.

That was a major reason that Mercury Funds of New York sought to work with Franklin Templeton of San Mateo, Calif. in the distribution of Arkansas' 529 plan, said Mike Saliba, director of 529 business development for Mercury.

The partnership, which was announced earlier this month, will combine Mercury's knowledge of 529 plans with Franklin Templeton's distribution strength, Saliba said.

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