Legislation to make 529 college savings plans permanently tax-free could draw more assets and investors to the product, but analysts said they doubt a bill introduced this week will create a rush of college savings plan sponsors.
The product, named for a section of the tax code that became law in January 2002, was expected to rival 401(k) programs as asset accumulators, but their growth has been slowed, possibly because of a provision in the 2001 tax-cut legislation that would repeal all its tax breaks in 2011.
Reps. Melissa Hart, R-Pa., and Earl Pomeroy, D-N.D., both members of the tax-writing House Ways and Means Committee, introduced a bill Tuesday to make the 529 tax break permanent and were joined by a bipartisan group of committee members.
Bruce Harrington, a vice president and the director of product development and marketing at MFS Investment Management in Boston, said the bill’s enactment would increase asset flows into 529 plans by 20% to 30%.
Assets in 529 savings plans rose $3.93 billion, to $55.43 billion at March 31, up 6% from the yearend total, according to Financial Research Corp., a Boston research company. The asset total was 38.6% higher than the year earlier.
But projections of 529 sales had been considerably richer just before they became law. Joseph Hurley, the founder of a college savings plan Web site, savingforcollege.com, in Rochester, N.Y., said in December 2001 that the 529 product would attract assets “into the trillions” in the coming years and said financial institutions were preparing for a rush.
Bill Raynor, vice chairman of the College Savings Foundation, said the new bill would encourage saving more for college by removing the uncertainty about the durability of the 529 plan tax break. “The unknown has been removed if this bill is passed,” he said. “It becomes simpler for everyone to save for college, and the easier this is to explain, the more people are comfortable saving.”
“The No. 1 concern that we hear from investors is a nervousness about the uncertainty of what will happen in 2010 when this sunsets,” Mr. Harrington said. “We project that if they make this permanent assets will increase substantially.”
The legislation’s passage would stimulate asset accumulation but not draw new program managers to 529 plans, he said. “Everyone that wants to be in this business is here already,” he said. “This legislation will impact who is buying, but it won’t change who is selling it.”
Since State Street Corp. left the business last October other 529 plan providers have considered following the Boston bank’s lead, Mr. Harrington said. Providers have been jumping off the 529 bandwagon as they struggle for scale, he said.
Mr. Harrington said companies need at least $250 million of 529 plan assets for the business to be profitable. Each of the top 40 college savings plans had at least $86 million of assets, he said, but the 50th-largest had only $16 million. Mr. Raynor, who runs AIM Investments’ $700 million education savings business, said the profitability threshold may be as high as $500 million.
State Street, by contrast, blamed insufficient scale for its decision to quit the college savings business despite the $1.05 billion of assets under management in its Schoolhouse Capital unit’s 529 plans at Sept. 30. It was the 11th-largest 529 manager at that point, according to data from Financial Research Corp. State Street said at the time it expected to save $50 million a year by getting out of the business.
“You have got to get the scale because this is an expensive product to run based on the marketing expenses and costs of working with a state,” Mr. Raynor said. “There are significant costs associated with this product.”
He added, predicting a shakeout that would rationalize the 529 marketplace, “I think the market will play itself out over the next couple of years.”
“This is an expensive proposition,” he said. “Markets are not expanding tremendously, and asset flows into these companies [are] not what they used to be. It is hard to invest into a start-up or a new venture if it is slow to produce.”
Though all signs are positive for the new 529 bill’s passage, Mr. Raynor said, Congress will carefully weigh how much of a tax loss it could cause and whether this fits the overall tax strategy.
“A lot depends on the Republican leadership working together,” he said. “We are thrilled and optimistic. This is a high priority for Congress and one of the key bullet points for Bush’s reelection. The stars are aligned. Now it is just a matter of getting it done.”
