529 plans achieving ‘critical mass’

Aug 6, 2007 @ 8:18 am

By Charles Paikert

NEW YORK — One year after the passage of the landmark Pension Protection Act, which made federal tax breaks for Section 529 college savings plans permanent, the programs are approaching “critical mass,” according to the head of the College Savings Plan Network. “As new contracts are being implemented, you’re looking at the next version of products and enhancements, at a lower price, with more choice and proliferation of information and knowledge,” said Jackie Williams, chairwoman of the Lexington, Ky.-based organization for state administrators and executive director of the Columbus-based Ohio Tuition Trust Authority. Just two weeks ago, for example, after a hard-fought battle for the contract, New York-based OppenheimerFunds Inc. took over as program manager for Illinois’ $2.2 billion Bright Start College Savings Program in Chicago and immediately introduced a new Index Age Based Portfolio. Oppenheimer plans to introduce a new Education CD next month for the Oregon 529 College Savings Network in Salem. The certificate of deposit offers investors principal protection and an upside return linked to the Standard & Poor’s 500 stock index. Other new 529 products include a money market fund offered by Pennsylvania’s Tuition Account Program in Harrisburg and the T. Rowe Price Total Equity Market Index Fund, offered by the Baltimore-based College Savings Plans of Maryland. The increased options appear to be paying off.

Product reinvention

Oppenheimer sees new contracts as an opportunity to “reinvent or enhance” its 529 products, said Raquel “Rocky” Granahan, an Oppenheimer vice president and director of College Savings Programs. Oppenheimer is negotiating with Texas to take over as program manager of that state’s $227 million Tomorrow’s College Investment Plan in Austin, she added.

The Oregon Education CD, Ms. Granahan said, is designed to appeal to lower- and moderate-income families who may have limited investing experience and “tend to be risk averse.”

And while Maryland’s actively managed products remain more popular, the new index fund — which costs 0.27 percentage points — provides cost-conscious families with a much-needed investment option, said Joan Marshall, executive director of the Maryland Plan.

Many state 529 plans, as well as some of the nation’s leading program managers, are reporting impressive numbers for the first half of the year.

For example, The Vanguard Group Inc. of Malvern, Pa., which offers investment products in 20 state 529 plans and distributes nationally sold plans in eight states, said its 529 plan assets total $20 billion, a 54% increase from the $13 billion held in the accounts last year.

Net cash flow, or new purchases of Vanguard 529 products during the first six months of 2007, climbed 18% over the comparable period last year, totaling $2.6 billion, compared to $2.2 billion in 2006.

More than half of the net cash flow in Vanguard’s 529 accounts went into the company’s age-based portfolio options, according to John Heywood, the Vanguard principal who heads its education markets group, which oversees the company’s 529 relationships at the state level.

“People can set it and forget it,” Mr. Heywood said of the target-date funds. “There’s a lot of comfort in that.”

Popular option

In Pennsylvania, where mutual funds available in TAP 529 plans were switched in November from those offered by Philadelphia-based Delaware Investments to funds from Vanguard, the latter’s Aggressive Age-Based Option portfolio option has been particularly popular, accounting for 40% of new investments since the beginning of the year.

In fact, total contributions to the Direct Investment Plan rose nearly 50% to $71.6 million through June 30, up from $48.2 million in new investments for the comparable period last year.

Oppenheimer, which manages 529 plans in four states, saw assets rise $1.6 billion during the first six months of the year, a 20% jump from $1.2 billion during the year-earlier period. That increase does not take into account the recently added Illinois plan.

Sales during the first six months of 2007 rose 19% to $178 million, up from $150 million for the comparable period a year earlier. Net sales rose 13% to $140 million through June 30, from $124 million.

Section 529 plans, officially known as qualified tuition programs and named for a section of the Internal Revenue Code, were created in 1996 and refined through legislation in 1997, 2001 and 2006.

In addition to last year’s Pension Protection Act and the product innovations and lower fees that are helping to drive college savings program sales, wholesalers are now paying more attention to adviser-sold 529 plans, which account for approximately 80% of assets, said Bill Raynor, vice president for Oppenheimer College Savings Programs.

“They’re actively selling it now,” said Mr. Raynor, who is a board member and head of membership recruitment for College Savings Foundation, a Washington-based industry trade group. “529 plans have become a discussion point. The public is better educated, and it’s making sales easier,” he said.

Mr. Raynor and other industry figures also credit the College Saving Plan Network’s new website, collegesavings.org, which was launched in the spring and is now receiving more than 3,500 page views a day, with helping to increase awareness and drive 529 business.

“The web site is helping,” said Ms. Marshall. “We’re also seeing more positive coverage in the press and more word of mouth about 529 plans, which is huge. Word of mouth is far more important than any advertising we do. There’s more critical mass right now.”


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