ALBUQUERQUE, N.M. -- New Mexico this month will become the first state to simultaneously launch tax-deferred savings and prepaid tuition plans for college expenses.
The New Mexico Education Trust Board hired State Street Global Advisors as the service provider for the 529 tax-deferred savings plan, the firm's first foray into the education saving market.
Executives at Boston-based SSgA said the 529 plan market may grow enough to be a significant source of revenue for money managers.
The education saving market totals roughly $4 billion, with about $3 billion of that in prepaid tuition programs, said Ralph J. Constantino, SSgA principal. "But these only began in 1996. We believe that there is tremendous pent-up demand."
The savings plans will be marketed to employers, urging them to let employees contribute through payroll deductions, much like 401(k) plan contributions. Private companies may not face the fiduciary issues associated with retirement plans, however, because the state, not the employer, is the plan sponsor.
State employees will be allowed to contribute through payroll deductions, said Robbie Heyman, the education trust board's vice chairman.
The savings plans will be available to anyone living in the United States, Mr. Heyman said.
"If we were just doing a prepaid tuition plan in New Mexico, we would not be able to get a major firm, because we would not have a big enough dollar amount sufficient for them to administer a fairly complicated program," he said. "We thought we needed to add a savings program to allow people who could put more money away to put more money away."
Moreover, making the savings program available nationally allows SSgA to reach a larger audience and "add the 529 plan to their product line," said Mr. Heyman, a partner in the Albuquerque-based law firm Sutin, Thayer & Browne PC.
New Mexico follows 22 other states that offer higher education financing programs, including Colorado, Maine, New Hampshire, Delaware, Massachusetts and New York. But only a handful have both types of plans, including Florida, Virginia and Tennessee, Mr. Constantino said. "This market can't be as big as the defined contribution pension plan market because workers work longer than students attend college, but it will be a hugely significant market," Mr. Constantino said.
Fifty-four percent of parents regularly save for their children's college, according to a 1999 survey sponsored by Fidelity Investments, Boston. Of those parents who do save, 34% use tax-advantaged savings vehicles such as state-sponsored savings plans, pre-paid tuition plans or Education IRAs. While only 17% of parents were aware of new state-sponsored investment plans -- up from 10% the year before -- 49% indicated they would be somewhat or very likely to use a 529 plan after hearing a brief description of the plans, the Fidelity survey revealed.
For its part, New Mexico will be able to provide a benefit to its citizens at no cost to the state, Mr. Heyman said. Instead, state officials expect to see some revenues generated from the program, because SSgA will pay the state a set amount for each account in the savings program, Mr. Heyman said.
To help ensure the state will not lose money on the prepaid tuition plan because of tuition increases, SSgA agreed to guarantee the state a return equal to the average tuition increase of all states' public schools, he added.
Unlike in other states, participants in the 529 plan will have some choice as to how their money is invested. Participants in education savings plans can't change their initial investment choices, but they can redirect new contributions.
New Mexico's program will be one of the first allowing participants to tailor their investment strategies and choose between two investment tracks, Mr. Constantino said. The age-based choice is an automatic investing track that cycles through a series of five diversified portfolios and has specific asset allocation targets that change as the beneficiary gets older. Most states offer only this type of option.
The custom choice allows participants to design their own investment strategies by mixing and matching any combination of eight investment portfolios, Mr. Constantino said. The portfolios are:
* Equity, with targets of 82.5% domestic and 17.5% international;
* Bonds, with an asset allocation range of 0% to 15% high-yield and 85% to 100% international;
* Cash, 100% money market securities;
* Aggressive growth, with a target of 85% stocks, 15% bonds;
* Growth, with 70% equities and 30% bonds;
* Moderate growth, with 55% equities, 40% bonds and 5% cash;
* Conservative growth, with targets of 40% equities, 45% bonds and 15% cash; and
* School years portfolio, with targets of 20% equities, 40% bonds and 40% cash.
The plan also will feature outside mutual fund families run by money managers with new alliances with SSgA, Mr. Constantino said.
Twenty years ago, roughly two-thirds of federal aid was in grants and one-third was in loans, he said. Now the situation has been reversed, with two-thirds of federal aid in the form of loans, he added.
