The Ohio Tuition Trust Authority has added savings accounts and certificates of deposit from Fifth Third Bank of Cincinnati to its 529 savings program as more states turn to banks to enhance their college savings options.
Jackie Williams, the Ohio plan’s executive director, said that, though Hawaii is offering a “CD-like” college savings product, Ohio is the first state to offer a bank partner’s products in conjunction with a 529 plan.
“I think that we have seen since we launched our program in 2003 a significant portion of the population that we serve that wants very safe, very easily understood savings options for college,” she said.
Ohio may be the first to offer bank products in its 529 plan, but it will not be the last. Ms. Williams said at least five other states — Virginia, Colorado, Missouri, Wisconsin, and Kansas — are expected to launch similar products in their state plans within six months.
“We have received a lot of inquiries about this suite of products,” she said. “There is quite a bit of interest.”
The Fifth Third 529 Savings Account is FDIC-insured and will offer an introductory interest rate of 3.25% for the first year. After the introductory period, the accounts will offer premium rates of interest and will be tiered by how much families save. The more in the account, the higher the interest rate. There are no fees associated with the savings account, and contributions can start with as little as $15.
Jim Cross, a deposit product manager at Fifth Third Bank, said he has not been approached by other states looking to use its product. “We have certainly seen other states are interested in exploring the same idea, but we are not currently talking to any,” he said.
Ms. Williams said research in Ohio found significant numbers of people who want “less volatile” savings options when saving for their children’s college education.
“A majority of people indicated that they currently plan to save with a banking product, even if it means being outside of the 529 structure,” Ms. Williams said. “People simply don’t want to take a risk with their college savings dollar. They like it to be accessible and invested at a predetermined rate. They like that the accounts are backed by FDIC insurance. CDs and savings accounts are perceived as the safest investment to save for college.”
Mr. Cross said that very few FDIC-insured options exist for people with 529 plan accounts, and that the ones available can be confusing. Fifth Third’s product, he said, is similar to a traditional deposit product and easier to understand.
The product will appeal to conservative bank investors and other people who want to save for college a little bit at a time, Mr. Cross said.
Ms. Williams said it would appeal particularly to low- to moderate-income families. “As people that operate for the state, we want to have a lineup of products that accommodates every saver and every investor,” she said. “These [bank products] are important for lower- to moderate-income residents; we want to have options to enable everyone to save for college.”
Analysts said that the savings products are an interesting addition but that the low returns on savings accounts and CDs may not keep up with tuition cost inflation.
“Mutual funds have proven to be a very suitable investment that over time will rise,” said Burton Greenwald, an analyst at BJ Greenwald Associates in Philadelphia. “Investors are worried about volatility now, but these investments are not going to be needed for distribution for another 15 to 20 years.”
Ms. Williams agreed that, at the rate of college expense inflation, these products alone may not be sufficient. But different people saving for college have different needs and priorities, she said.
“These products provide safe, predictable rates of return,” she said. “They offer these customers a little peace of mind about the fact that this money will be there when it is time for their children or grandchildren to go to college.” Over time they can diversify their college savings investments, she said, but this product gets them to begin saving.
She added: “We are not trying to dictate how people save. We want to give them a variety of vehicles and let them determine the best way to save.”
During the past two years Ohio has worked to diversify the options available in its 529 program. In May 2004 it added 15 Vanguard index investment options to the existing lineup of options managed by Putnam Investments. The new options consisted of three age-based choices, five multifund balanced choices, and seven individual fixed-income and equity choices. Last November, Ohio added two more Putnam age-based options.
