E-Mail this Article

529 plans an easier sell for advisers as equity markets shine

May 29, 2014 @ 12:24 pm

By Liz Skinner

529 college savings plans, Morningstar
+ Zoom

Americans continue to invest their college savings dollars through tax-advantaged Section 529 plans, with assets nearing $200 billion at the close of 2013, a 20% boost from the year before, according to Morningstar Inc.

Equity market gains, of course, “stoked” the increase in assets under management last year, said Kathryn Spica, Morningstar senior analyst for fund-of-funds strategies.

Major equity indices advanced in the 20% to 30% range last year, while the Barclays U.S. Aggregate Bond Index fell about 2% in 2013. Investors in college savings plans typically choose portfolios with multiple asset classes.

(Don't miss: Ranking the top 10 529 plans)

“In 2013, as well as in previous years, the categories attracting the most flows are diversified among stocks, bonds and cash,” Ms. Spica said.

Named after the tax code provision that created them, 529 plans are funded with post-tax dollars but grow tax-free as long as the money is used to pay college-related expenses. Most states also offer their own residents a state tax deduction for investing in their plan.

Of the 84 plans analyzed in the Morningstar study, about $102 billion is held in direct-sold accounts and $98 billion is in adviser-sold plans. Both types of accounts showed about equal growth in 2013, thus ending the recent trend of having more money flowing into the plans that investors access themselves.

“When the markets are up, it's very easy for advisers to proactively market additional ways for people to save and invest,” said Andrea Feirstein, managing director of AKF Consulting. “The positive flow is a statement that financial professionals are now willing and able to proactively market a good story.”

The two categories of bonds that saw net outflows in 2013 were U.S. Government and intermediate bond investments. The reason for the outflows could be concern about interest rates rising, or simply that families may be using funds in these investments to pay for college expenses, the analysis said.

(More: Nitty-gritty of claiming college tax credits)

The category of investment with the highest amount of new asset flows was “static conservative allocation,” which received $890 million last year, Morningstar said. With static options, the manager invests in a set mix of equity, bond, real estate and other assets over the life of the account.

Age-based investment options, which move to a more conservative allocation as the student nears college age, have changed since Morningstar started keeping track of the 529-plan market in 2010, the investment rating firm said. The glide path today has less equity exposure during the earliest years and slightly more equity exposure during the middle years, Morningstar said. The typical age-based options begin with 80% in stocks and over time trim that exposure to 10% by the time the student is ready to enter college.

Morningstar rated individual plans back in October.

Virginia's adviser-sold CollegeAmerica plan remains the nation's largest 529 plan with more than $44 billion in assets. It's distributed through the plan's program manager American Funds.

Assets in 529 plans grew 25% in 2012, another year with double digit equity market gains and positive results from bond markets, too.

Get Daily News & Intel

Breaking news and in-depth coverage of essential topics delivered straight to your inbox.



The information entered on this page will not be used to send unsolicited e-mail, and will not be sold to a 3rd party.

REMINDER: This service is for personal use only. For commercial reprints, Web links and e-mailings please contact our Reprint Sales Manager at (732) 723-0569.