Expect continued asset growth, more industry
consolidation, competition and investment choices as well as broader participation in Section 529 college savings plans in the future, say state administrators of the programs, financial service executives and industry observers.
The industry also faces a number of challenges, they caution, including a need for increased product awareness, more acceptance by financial advisers and possible competition from other tax-advantaged financial options.
"College savings will become a more crucial part of families'
financial planning, becoming almost as important as retirement planning," said Kevin McMullen, chairman of the College Savings Foundation, a Washington-based industry advocacy association.
"Accordingly, we expect financial service firms — along with the government and non-profits — to bring more focus to early education of families on the need to plan for their children's college education," he said.
"As a result, we expect 529 assets to continue to grow year after year," said Mr. McMullen, who is counsel for State Farm Insurance Cos. in Bloomington, Ill.
From the end of last year's first quarter through this year's, assets in 529 college savings plans increased 15.6% to an estimated $108.7 billion, according to the Boston-based Financial Research Corp. However, that total also represented a 2.9% decrease from $111.9 billion at the end of the fourth quarter of 2007, according to FRC data.
As the 529 industry continues to mature, fewer financial service companies will compete for program and investment manager contracts from states.
"Program managers with marginal profitability will exit the marketplace and larger programs will take their place," said industry consultant Peter Mazareas, chief executive of Nahant, Mass.-based Strategic Advancement Group Inc.
Program and investment managers who are able to "attain scale and leverage technology ... will be at a competitive advantage," said John Heywood, principal of
The Vanguard Group Inc.'s retail investor group.
"We expect the industry to remain highly competitive as many state 529 plan contracts expire and program managers and investment managers look to obtain mature programs that have already achieved scale," Mr. Heywood added.
Not coincidentally, Vanguard, based in Malvern, Pa., is one of the industry's fastest-growing and most aggressive investment managers, with more than $20 billion in 529 assets in 20 states.
Age-based investment options will most likely remain the most popular investment selection in 529 plans, Mr. Heywood said.
But there will also be a "continuing trend toward new types of investments as the 529 pie grows," according to Joe Hurley, president and chief executive of Pittsford, N.Y.-based Savingforcollege.com LLC.
"We're seeing more socially conscious investments, minority-managed and other special purpose investments in some 529 plans," Mr. Hurley said. "There is now an ETF plan available and more bank products are coming on stream."
Many in the 529 business are also convinced the pool of investors in 529 plans will expand in the next 10 years.
"There is still an under-representation of people with low- to moderate-income levels in 529 plans," noted Jacqueline Williams, chairwoman of the Lexington, Ky.-based College Savings Plan Network, an organization representing state administrators of 529 plans.
"I think you're going to see a lot of creativity and innovation from plans to address that situation and extend the benefits of college savings programs to families from all income levels," said Ms. Williams, who is also executive director of the Columbus-based Ohio Tuition Trust Authority.
Aging baby boomers with time on their hands and workers who need to be retrained will also increasingly take advantage of the 529 plans' federal tax break for qualified education expenses, industry observers predicted.
"I expect to see a rise in baby boomers taking on college courses," said Raquele "Rocky" Granahan, senior vice president and director of 529 college savings plans for New York-based OppenheimerFunds Inc.
Indeed, the Virginia College Savings Plan, the nation's largest with over $25 billion in assets, is already "focusing more attention on lifelong learning," said Mary Morris, executive director of the Richmond-based plan.
The Virginia plan is also targeting adults "to save for their own higher education or advanced degrees, not just for their children," Ms. Morris said.
"More and more, 529 plans will also be seen as an effective way to help adults in the work force pay for retraining required to either keep a current job, move up the ladder with a current employer, or find other employment," said one of the industry's leading legal experts, James "Jamie" Canup, a partner with Troutman Sanders LLP in Richmond, Va.
Increasing overall awareness of 529 plans among the general public and financial advisers is "the biggest challenge the industry faces," according to Ms. Granahan.
More and better marketing of the plans will be critical in the future, added Mr. Mazareas.
"529s are complex, different and many states have different tax treatments, so advisers and consumers simply don't bother," he said.
Another cloud on the horizon is the possibility that 529s may have to compete harder with other tax-advantaged financial instruments, said Mr. Hurley.
"Higher limits on individual retirement accounts or 401(k) plans would pull assets from 529 plans," he said.
What's more, Mr. Hurley warned, if Congress passes legislation calling for an IRA-like lifetime or family savings account "it could leave 529s as a vehicle only for the wealthy, which is politically untenable."
E-mail Charles Paikert at [email protected].
