The college savings industry has welcomed a regulatory ruling that lets 529 plan owners change their investment strategy twice a year, rather than once.
But those in the business say it is unclear whether the change, which is scheduled to expire Dec. 31, is helping the industry.
"It's probably too early to tell if it will have a measurable effect on sales," said Jeff Coghan, director of 529 plans at Hartford Life Insurance Co., whose 529 program had $800 million of assets at the end of 2008.
Still, he and his counterparts in the college savings industry voiced regret that the change that the Treasury Department and the Internal Revenue Service announced last month is temporary.
The change followed last year's market slide, which left many 529 accounts, particularly those composed mostly of stocks, with losses. Investors deposit after-tax dollars into the accounts and choose from a range of investments. Beneficiaries can use the earnings tax-free to pay for higher education.
But the limits on reallocation might not have had much to do with customers' interest in opening accounts, said Mr. Coghan, whose Hartford Financial Services Group Inc. unit sponsors West Virginia's 529 program. "I would question how many advisers really didn't put their clients into a 529 plan because of this," he said.
Bruce Haggeman, head of sales for BBVA Compass Brokerage, said it appears a tiny minority of 529 account owners tend to change strategies once they've set up an account. "About 5% of the people we've met with so far have changed their investment strategies," said Mr. Haggeman, whose Banco Bilbao Vizcaya Argentaria SA unit offers 529 programs through American Funds, Franklin Templeton Investments, Hartford Life, and Van Kampen Investments. "But they really like the peace of mind of knowing that they have the ability to do so."
Mr. Coghan agreed that only a tiny slice of individuals who own 529 accounts tend to change direction. One reason is the popularity of target-date funds, which are designed to reduce risk as beneficiaries near college age, he said.
But having two chances to change this year might increase account owners' comfort in changing course at least once in a volatile year, Mr. Coghan said, since a client who made a change in the wrong direction could reverse course if "something catastrophic happens" in the markets.
Joe Hurley, the founder of Savingforcollege.com, agreed that "people will feel more comfortable going in now and making a change without worrying whether they will need to make a change later in the year."
The increased flexibility is a net positive, and it is unfortunate that it is only temporary, Mr. Hurley said. "Making it temporary just creates more confusion, I think."
Proposed legislation to make the change permanent did not make it into the final version of the stimulus bill signed last week.
Mr. Haggeman hopes regulators revisit the issue, though it would be unwise to allow more than two changes a year. "If it's more than that, people will lose sight of the [plan's] objective," he said.
The stimulus package did contain good news for the college savings industry. It added computers and related technology to the list of qualified college expenses, at least for this year and next year.
The market turmoil has prompted 529 programs to add safer investment options. In recent months Wisconsin, Utah, and others added certificate of deposit portfolios and savings accounts.
The 529 industry has a wish list of regulatory changes, but Mr. Hurley said some of the biggest ones are unlikely to happen soon, including allowing 529s to be used to repay student loans and allowing employers to contribute to employees' accounts without the employees incurring taxes — something that would have cost the federal government revenue.
"That idea of providing a tax-free employer contribution would have a significant impact, and that makes it less likely," he said.
