Savers pulled money from 529 plans in 3Q

For the first time in three years, more money flowed out of Section 529 college savings plans than into them, according to new quarterly data from Financial Research Corp.

About $354 million was yanked from the plans in the third quarter, compared with $900 million of inflows a year earlier, FRC said.

The last time that the universe of 529s reported net outflows was the third quarter of 2008, when $3.2 billion exited the plans.

Total assets in the savings plans also fell for the quarter to $134.6 billion, from $149.8 billion as of the end of the second quarter. That’s the first time that figure has dropped in two and a half years.

However, on a year-over-year basis, assets were up 5%, from $127.8 billion at the end of the third quarter in 2010, FRC data show.

The third quarter is usually a period when large numbers of people take money out of the plans to pay for tuition.

In addition, FRC analyst Paul Curley said that demographics played a part in the outflows.

“The industry is about 14 years old, so those who were early investors are finally taking out their money for the goal,” he said.

The sputtering economy is lowering discretionary contributions into 529 plans, Mr. Curley said.

FRC projects a return to net inflows of about $3 billion for the fourth quarter as investors boost contributions to the plans to take advantage of tax savings features before the end of the year.

A NAYSAYER

But Andrea Feirstein, managing director of AKF Consulting Group, which advises state administrators of 529 plans, isn’t so sure that assets will bounce back by such a large amount. The negative impact that volatile markets and Washington’s dysfunction are having on investors hasn’t gone away, she said.

“There’s a much greater sense of uncertainty in the third quarter of 2011, compared to 2010,” Ms. Feirstein said. “I don’t see what’s changed in American sentiment since Sept. 30.”

Savers with moderate incomes who are unsure about their employment prospects or may be making less at work don’t have the resources or the confidence to put money into college savings right now, Ms. Feirstein said.

Of the universe of 529 plans, adviser-sold plans experienced net outflows of $577 million during the third quarter, compared with direct-sold plans, which reported $223 million of new dollars, FRC said.

LOWER COST

The shift away from adviser-sold plans could be attributed to a move by registered investment advisers to steer clients to low-cost, direct-sold 529 plans, Ms. Feirstein said.

In addition, direct-sold plans “may just be doing a better job of getting the word out,” she said.

Section 529 plans are set up by states and offer tax-free gains on earnings if used to pay for eligible college expenses. Many also offer residents state tax deductions on a certain amount of annual contributions.

Email Liz Skinner at [email protected]