All 50 states now offer at least one plan, and some offer several, creating a total of about 70 college savings plans across the country. (See our annual 529 Savings Plan Provider Guide compiled by Survey Editor Karen Burke that follows this story.)
Even for advisors, comparing plans can be time-consuming. There is so much information to sift through, and it's difficult to make apples-to-apples comparisons on performance. "I think the key issue with 529 plans is there is a lot of confusion in the marketplace. The state provisions vary widely and the vendor provisions vary widely. You can spend all day doing comparisons on these plans. It can be a struggle to understand them," says Jim Dake, director of financial planning for MetLife Financial Services in Raleigh, N.C., which offers 32 such programs through its broker-dealer.
The Savingforcollege.com Web site is a well-known place to visit to help compare plans. The firm, based in Pittsford, N.Y., is scheduled to introduce a subscription service, 529ProSolutions, in late April or early May that will do client-specific analysis and score plans on investment performance, says Jeffrey Clark, senior vice president for business development at Savingforcollege.com. The platform will evaluate the plans' underlying investments, making it easier to compare performance across plans, he adds.
Other Issues
Assets in 529 college savings plans more than doubled last year to $19.2 billion, FRC's Dow says. Although that was very significant asset growth, the accounts fell short of the $24 billion FRC predicted, mainly because of underlying asset depreciation resulting from the struggling stock market, Dow says. Net sales were between $10 billion and $11 billion, compared with FRC's $13 billion estimate for 2002.
Observers overwhelmingly agree the bear market has slowed asset growth. Not surprisingly, many plans' equity portfolios experienced double-digit losses last year.
But FRC thinks the nascent industry will take off in the coming years and assets will approach $100 billion by the end of 2005. Market penetration is only 5% to 7% of households with children under 18, so there is tremendous upside, especially as advisors and investors learn more about the plans, he says.
At the end of 2002, the average account size was only about $5,750, he adds. The bear market and the fact that many plans have been around for less than two years are contributing to that relatively low average balance, industry observers say.
However, some people are making larger contributions. "We're seeing a good amount from grandparents making gifts," says Bruce Harrington, vice president and director of 529 plans for MFS Investment Management in Boston. "We've had 500 accounts established with $11,000 or more. We've had 250 accounts started with $55,000 and actually had 50 accounts with $220,000-grandma, grandpa and mom and dad all doing $55,000." MFS is program manager for Oregon's MFS 529 Savings Plan and an investment manager for plans in Maine, Colorado and Illinois.
Creating a few clouds on the 529 plan horizon is the fact some states are clarifying or changing their tax rules regarding out-of-state plans. For example, the Tennessee Department of Revenue recently issued a notice saying it will tax earnings annually from out-of-state plans owned by residents, notes Bryan Howard, an attorney with Waller Lansden Dortch & Davis in Nashville. The notice also states that if a resident owning a non-Tennessee 529 Plan dies, the 529 plan will be considered part of his or her taxable estate and subject to Tennessee inheritance tax, he adds.
Still, Howard is optimistic about the plans. "The complexities of 529 plans will undoubtedly keep some people from investing in them. However, in my opinion, the benefits are so substantial that they will continue to be widely utilized," he says.