For the first time in three years, more money flowed out of Section 529 college savings vehicles than into the plans, according to new quarterly data from Financial Research Corp.
About $354 million was yanked from the plans in the three-month period through Sept. 30, compared with $900 million of inflows during the third quarter of 2010, FRC said. The last time 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 recent quarter to $134.6 billion, the first time that figure has dropped in two and a half years. Assets totaled $149.8 billion at the end of June 2011. Assets in the plans, though, were up about 5% to $134.6 billion Sept. 30, up from $127.8 billion a year earlier, FRC data show.
So what's behind the net outflows? For starters, 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 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,” Mr. Curley said. He added that the sputtering economy is lowering discretionary contributions into 529 plans.
FRC projects a return to net inflows of about $3 billion for the last quarter of 2011 as investors boost contributions to the plans to take advantage of tax savings features before the end of the year.
Andrea Feirstein, managing director of AKF Consulting Group, which advises state administrators of 529 plans, isn't so sure assets will bounce back by such a large amount. The negative impact that volatile markets and Washington's dysfunction is having on the investor psyche 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.”
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Savers with a moderate income 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, she said.
Of the universe of 529 plans, adviser-sold plans experienced net outflows of $577 million during quarter ending Sept. 30, compared with direct-sold plans, which reported $223 million of new dollars, FRC said.
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Some of the shift out of adviser-sold plans could be a result of increasingly active registered investment advisers' steering clients to low-cost 529 plans that are direct-sold, 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.
