BOSTON - Assets in the 529 college savings plan market are expected to grow to $145 billion in 2008 from $20 billion in 2002, according to a soon-to-be-released study by Cerulli Associates Inc.
But most of the money is expected to stay in the proprietary investment options of firms managing the plans, the study says.
"There's a bigger percentage in proprietary funds in 529 (plans) than in defined contribution plans," said Luis Fleites, analyst with Boston-based Cerulli.
More than 76% of 529 assets are in single-manager rather than multimanager plans, Mr. Fleites said. A single-manager plan has one money manager that runs the 529 program for the state, which sponsors the plan. Forty-nine states now sponsor 529 plans, and 29 of them are single-manager plans
The five largest 529 plan providers offer only single-manager plans. Teachers Insurance and Annuity Association-College Retirement Equities Fund, New York, is the top provider in terms of assets under management, running plans for 13 states with a total of $3.1 billion in assets. Next is Alliance Capital Management LP, New York, with Rhode Island's plan and $2.6 billion; Fidelity Investments, Boston, with $2.3 billion and three states, is third. American Funds, Santa Ana, Calif., has one state and $2 billion in assets, and Putnam Investments Inc., Boston, has $1.9 billion in a single state.
"It's still a pretty small market, and even looking to 2008 with (a projected) $145 billion of assets ... compared to some $2 trillion in private DC, it's not that significant," Mr. Fleites said. "There are a lot of providers competing for a small asset base."
Future looks bright
Mr. Fleites said 529 assets should grow because more plans will be created and more families will be aware of the programs. Providers have committed to spending a few hundred thousand dollars to more than $1 million annually to advertise the plans, he said. Moreover, it should take five to 10 years before participants begin taking money from their plan accounts to pay for college, he added.
Single-manager providers may be enticed to add other money managers to their investment menu lineup, but these providers will continue to draw the dominant percentage of assets in the near term and are not expected to open their platforms right away. The top managers have the dominant position and until someone starts complaining, they won't be adding other money managers, Mr. Fleites said
However, TIAA-CREF may start shopping around, either to add an externally managed investment option or to include an investment by another manager in a style it does not currently offer as part of its age-based portfolios, said Timothy E. Lane, vice president of tuition financing at TIAA-CREF.
"I would not be surprised if the (multimanager approach) is a trend that proliferates," Mr. Lane said. This decision ultimately would be made by the states, he added.
Mr. Lane said he would not expect TIAA-CREF to actually add another manager within a year, because the firm would have to develop a strategy for including another manager and explain why the strategy would benefit participants. "There's no point in doing it just to be a multimanager," he said.
Investment management fees average 93 basis points. Utah, which runs its own program, has the lowest costs for participants at between 25 and 35 basis points. The Arizona plan, managed by Waddell & Reed Asset Management Group, Overland Park, Kan., offers the highest fees at between 222 and 271 basis points.
Some 66% of all 529 plan accounts have less than $5,000, while 26% hold between $5,000 and $20,000. Six percent have $20,000 to $50,000, while 2% have balances exceeding $50,000. The average account balance is $6,457, Mr. Fleites said.
Private tuition rates increased 5.8% to $18,273 and public tuition rates rose 9.6% to $4,081 annually, according to the New York-based College Board.
Still, there is potential for growth. Only 4.2% of children younger than 18 are covered by 529 plans. Considering the College Board's projections that a baby born in 2001 would need just shy of $250,000 to cover the total cost of a four-year private college, families soon will have to turn to some sort of savings vehicle. Mr. Fleites said 529 plans are a very effective choice because of the tax deferral; also distributions are now tax-exempt under the federal tax relief law in 2001.
The problem is that parents historically have had other financial needs, such as mortgage payments and retirement savings, which take precedence over the desire to save for their children's college education. Although Mr. Fleites said he expects usage of 529 plans to increase, no more than 40% of families with college-bound children are expected to participate.
Ten state plans hold 90% of 529 plan assets and 84% of the accounts, the study revealed: Ohio, New York, New Hampshire, Maine, Massachusetts, Rhode Island, Pennsylvania, California, Illinois and Connecticut. Some 21 states have multiple providers, Mr. Fleites said; of those, New Mexico and Nevada each have five providers.
The most popular investment menu is one with age-based portfolios, with 60% of 529 assets invested in them. Between 5% and 7% of assets are in stable value, and the rest in individual mutual funds. Of the 49 states that offer 529 plans, 83% offer age-based or time-based portfolios and 78% offer at least one fixed portfolio. Twenty percent of total assets are in individual mutual funds.
Investment options in 529 plans are expanding. New plans have an average of five investment options, up from one three years ago. This is expected to increase because of a change in the law that now allows participants to move their money among investment options, he said.
"We will see between 20% to 25% of assets in stable value if the trend continues in another year," Mr. Fleites said.