Sales of 529 college savings accounts continued to lag in the third quarter as some analysts began to worry that the once hot product's complexity and regulatory uncertainties are sapping its momentum.
Assets in 529 plans increased 5%, to $45.1 billion at Sept. 30, according to data from Financial Research Corp. released Monday.
Whitney Dow, an analyst at the Boston research company, said awareness and ownership of 529 plans, overall, remain relatively low. And though this quarter should prove to have produced strong sales, he said, the product is not likely to grow the way some predicted when it first appeared in 2002.
"I think due to the complexity of the product and the perception among advisers that it may not be worth the effort, this product is just not going to ever explode," Mr. Dow said. "This product is frustratingly complex, and the average account balance is only about $8,000. The product is a great way to inject value into a customer relationship, but advisers just aren't sure if it is worth the time."
With the variety of options and 529 plans available, he said, advisers are taking a step back and considering alternatives.
"Everyone knows how mutual funds work, but 529's are a much more involved process," he said. "I think that the complex landscape of 529 products - and in light of all the recent scrutiny - many folks feel that the reward just isn't there. Many advisers feel it is just easier to offer a taxable account with mutual funds or securities. This may not be the best thing for the client, but that is the reality right now."
Diana Cantor, the executive director of the Virginia College Savings Plan and chairman of the College Savings Plan Network, said she disagrees, however. She is working with "thousands of advisers," she said, and distribution of 529 plans is increasing.
"Growth of 529 plans was so astronomical from the beginning, we cannot maintain that kind of growth no matter what we offer," she said. "The average account balance is growing, and we are seeing growth. It is just steadier."
Ms. Cantor said Virginia's 529 plans had grown to $9 billion of assets under management last month, from $6 billion a year earlier. "This is still a growing market with a great deal of potential," she said.
Joe Hurley, the president of Savingforcollege.com, a Web site for 529 plan information, said many brokers are refraining from being too aggressive with the 529 product because some regulatory uncertainty surrounds it.
NASD is looking closely at the product to determine how it will be regulated, Mr. Hurley said. 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, has written the SEC that 529 plan fees are so high in some states that they outweigh the product's tax benefits.
This is all part of the product's evolution, Mr. Hurley said. "I would say this is not a surprise," he said. "There are indications that once some of these uncertainties are settled growth will resume very strongly."
Bill Burrow, a senior vice president and general manager of U.S. college savings at the John Hancock unit of Manulife, said only a small percentage of advisers' overall business comes from 529 plan sales. A survey of 1,100 financial advisers found only 3% generating more than 10% of their business from 529 sales.
The data nevertheless indicate that advisers understand the importance of 529 plans despite the product's relative newness, Mr. Burrow said.
"This is a young industry, and we are only a couple years in," he said. "As we get more time, advisers will become more comfortable with how to position clients with these products. It will continue to be a growing piece of business. These plans continue to be a good way to start a new relationship and expand other parts of an adviser's business."
Mr. Dow of Financial Research Corp. said he expects fourth-quarter net sales to come in at $4 billion to $5 billion, compared with $2.2 billion in the third quarter and $3.8 billion in last year's fourth quarter.
Because of yearend gift-giving and the tax season, the strongest sales of 529 accounts typically come in the fourth and first quarters, he said, when 60% of annual sales are recorded. But the small inflows of the past two quarters are cause for concern, he said.
"Frankly, it has been a sad summer," Mr. Dow said. "There were a lot of external factors hurting sales. There were regulatory concerns, the election, and the general market malaise."
