The 529 college savings plan market grew to $43 billion of assets in the second quarter despite the product's attachment to the increasingly scrutinized mutual fund industry and position in an uncertain regulatory environment.
Chris Lynch, a regional director of education and savings at TIAA-CREF, said in an interview Wednesday that the mutual fund trading scandals are "not helpful for other firms in the industry" and could have "a dampening effect."
Mr. Lynch said, however, that the New York retirement investment company, with more than $300 billion of assets, has had growth of 28% in its 529 business from July 2003 to July 2004.
Though sales have grown, the company must explain the trading scandals to new and existing clients. "Phone calls are getting longer," Mr. Lynch said in reference to sales pitches.
TIAA-CREF, which manages a dozen states' 529 programs, closely monitors participant activity and found that 60% of its 529 clients have made new contributions to their plans. "Recontribution activity is almost exactly on the same pace as last year," he said.
Regarding its existing book of 529 business, Mr. Lynch said, clients did not panic over the trading scandals. "We currently have 500,000 in 529 programs," he said. "There has been no unusual redemption activity."
Joe Hurley, the president of Savingforcollege.com, a Web site for 529 plan information, said the trading scandals may have had some effect on 529 sales and could have contributed to a recent slight slowdown in their pace of growth.
Mr. Hurley said, however, that more investors are concerned at the sunset provision on the tax break that has spurred 529 sales since 2002. "If the exclusion feature is made permanent," he said, investors would be less hesitant to buy 529 accounts.
The product's connection to mutual funds has done little to limit its growth, said Bruce Harrington, a vice president and the director of product development and marketing at MFS Investment Management in Boston.
"Growth continues, and 529 plans are still relatively untapped," he said. Roughly 10% of the population are investing in the product, he noted. Making the tax break for 529s permanent could accelerate growth, he said. MFS has more than $1 billion of client assets invested in 529 plans.
Disclosure continues to be an issue in the 529 plan industry.
The Securities and Exchange Commission announced in March that it was creating a task force to examine 529 plans, with an eye to disclosure and costs. Rep. Michael Oxley, R-Ohio, the chairman of the House Financial Services Committee, had written the SEC that 529 plan fees are so high in some states that they outweigh the product's tax benefits.
MFS, which manages a broker-sold 529 plan for Oregon and participates in 10 other state-sponsored 529 plans, said disclosure guidelines being considered by the SEC would help investors clearly identify the fees for each state's plan and compare their features.
The disclosures being examined by the SEC include the release of information about fees and costs, investment performance, federal and state tax considerations, investment options and managers, risk, and limitations or penalties connected with transfers or nonqualified distributions.
Mr. Lynch explained that TIAA-CREF operates as a direct-only sales shop and does not have a lot of face-to-face contact with potential customers. "About 95% of the business we do is over the Web and through the phone," he said.
John Heywood, a principal and head of the education markets group at Vanguard Group, said that 529 sales by the Malvern, Pa., company have been robust and it has experienced no reverberations from the trading scandals.
The market is rapidly growing, he said, and Vanguard added $500 million of net new 529 assets in the past 12 months. It manages four state programs and offers investment-only service in seven others.
Whitney Dow, the director of education savings research at Financial Research Corp. in Boston, said he was disappointed by the product's 7.4% sales growth in the second quarter. "There have been larger issues such as the flat stock market and the summer doldrums," he said, however.
"There are some names that have been hurt a little" by the mutual fund scandals, Mr. Dow said, "but those dollars are being allocated elsewhere." "Those deciding not to act are not doing so because of what's going on in the mutual fund industry," he said.
"One way to supercharge the industry would be the extension of" the tax break that is now scheduled to expire in 2010, Mr. Dow said. Withdrawals from 529 plans for qualified educational expenses have been exempt from federal income tax since Jan. 1, 2002.
Data gathered by the College Savings Foundation and Financial Research Corp. showed assets in 529 plans rising 7.4% in the spring quarter, from $40 billion at March 31. Estimated net sales of $7 billion in the first half were up 45.8% compared with $4.8 billion in the first half of 2003.
