Interest in Section 529 college savings plans that are backed by the Federal Deposit Insurance Corp. is picking up amid the stock market's downturn.
Last month, the Salt Lake City-based Utah Educational Savings Plan became the latest 529 program to offer a product insured by the FDIC.
The product is a savings account, and during its first three weeks, the plan raked in more than $10 million, according to Lynne Ward, its director.
"People are very reassured by the insurance, and the demand for the product has been very strong," she said. "Parents and grandparents think of it as a seat belt for their college savings accounts."
Other states that offer FDIC-insured 529 products include Arizona, Ohio, Montana and Virginia. While certificates of deposit are the primary
FDIC investment options in those states, Ms. Ward said, a savings account is better-suited for the Utah plan.
"We don't require a minimum deposit in our plan, [but] for CDs, you have to have a minimum investment of $500," she said. "We also liked the fact that a savings account is liquid."
Funds held in the account are held in
trust at Zions First National Bank, a subsidiary of Salt Lake City-based Zions Bancorporation, and are invested with Utah's Public Treasurers Investment Fund, also in Salt Lake City.
The savings account is earning a 1.85% annual yield, Ms. Ward said.
The popularity of FDIC-backed and other safety-oriented investment options will continue to increase, said industry observer Andrea Feirstein, managing member of New York-based AKF Consulting LLC.
'MORE COMFORTABLE'
"The industry has to find a way to make people feel more comfortable about the investments they make," she said.
About 50 college savings plans now offer less risky short-term-investment options, including money market funds, short-term reserve funds or cash reserve funds, Ms. Feirstein said.
"These are all good examples of possible investments for 529 investors, at least until they are more comfortable with the volatility in the equity and fixed-income markets," she said.
Data released this month by the Washington-based College Savings Foundation, an industry advocacy group, reflected a decrease in money flowing into college savings plans.
Gross sales into plans managed by CSF members totaled $1.27 billion during the fourth quarter of 2008, down 52% from $2.5 billion a year earlier.
During the last four months of 2008, net sales for 529 plans fell 38% to $2 billion, from $3.3 billion a year earlier, according to Boston-based Financial Research Corp., which developed the data for the CSF.
Assets in such plans fell to an estimated $88.5 billion at the end of the fourth quarter of 2008, down 21% from $111.9 billion a year earlier, according to the FRC.
The drop in college savings is a direct response to the financial crisis, said Deborah Fox, president of Fox College Funding LLC in San Diego, which works with families to develop college savings strategies.
"Even if parents aren't directly affected by the crisis, they think they have to save the money that they have, and are paying down debt or putting money away in a cash reserve," she said. "College savings have been put on a back burner."
Ms. Fox said that she is recommending that parents with children who are seven years or more away from college use dollar cost averaging — consistently investing the same amount of money at regular intervals — in equity funds in their children's college savings accounts.
"That way, they can weather the market's ups and downs, and take advantage of dips to buy," she said.
In fact, dollar cost averaging proved popular last year in the six 529 plans administered by
The Vanguard Group Inc. of Malvern, Pa.
Contributions to the company's plans in Colorado, Iowa, Missouri, Nevada, New York and Pennsylvania via automatic investments increased 16% to $615 million last year, from $530 million in 2007, according to Vanguard spokeswoman Amy Chain.
E-mail Charles Paikert at [email protected].
