529 Plans Under Scrutiny From SEC, NASD

Saving for college costs through 529 plans is a strategy that's gotten a lot of attention from advisors and their clients during the past few years. Lately, however, the investment vehicles are undergoing a different type of scrutiny: investigations by regulators.

Regulators are raising questions about the fees charged by 529 plans and the way in which they're marketed, and they have begun probing sellers of the plans. The Securities and Exchange Commission and the National Association of Securities Dealers have both launched investigations, and Congress has started its own review.

While no one is ready to declare problems in the 529 plan industry have reached scandalous proportions, observers say the flurry of regulatory activity could be damaging to the 529 plan industry, which constituted more than $37 billion in total assets as of the end of February.

If, for example, the SEC were to find that 529 plans are charging excessive fees, says Morningstar analyst Dan McNeela, "I think certainly the negative press could turn people off of 529 plans."

The SEC and NASD probes both deal with different facets of 529 plan sales. SEC Chairman William Donaldson, in a letter to House Financial Services Committee Chairman Michael Oxley (R-Ohio), says the SEC will form a task force that will look at whether or not 529 plans are adequately disclosing fees and other expenses.

The NASD investigation, meanwhile, centers on six securities firms it suspects of having steered too many investors into 529 plans outside their home states. By doing so, investors lost state tax deductions and other benefits to investing in a 529 plan sponsored by their home state.

The NASD is also reportedly considering expanding the investigation beyond the six companies.

Industry observers say that probes are not entirely surprising. The fee structures of 529 plans vary from state to state, and can be a mish-mash of confusing terms. McNeela says the fee structures of some 529 plans make it impossible for investors to even calculate how much their fees will be before they enroll.

Joseph Hurley, founder and CEO of Savingforcollege.com in Pittsford, N.Y., says the industry has made some inroads in improving disclosure of fees and expenses in recent years. Still, he says, "There is little uniformity between programs in how they structure their fee. Even when they're properly disclosed, it's confusing."

McNeela feels the NASD investigation could have the most impact. One issue the NASD will look at is whether clients are aware of the benefits they lose when opting for an out-of-state 529 plan. The other, and more explosive question, he says, is why so many brokers have steered clients into such plans.

"If it turns out that brokers are in some cases rejecting in-state plans because commissions are more lucrative from other plans, that's a pretty significant problem," McNeela says.

REITs Stage Dramatic April Retreat

Prices of real estate investment trusts collapsed in early April, following the upbeat March unemployment report that triggered fears of rising interest rates. Between April 2 and April 14, REIT prices fell between 12% and 14%, and some experts warned that they could lose favor to the broader stock market.

For most of the last three years, REITs have enjoyed an "extraordinary run," according to Keith Allaire, managing director of Robert A. Stanger & Co. The single most important factor behind their appreciation was that they were about the only vehicles where investors could earn a 6% return and have a chance for the underlying investment to appreciate as well.

A potential uptick in interest rates could make REITs less attractive as an income vehicle, particularly if bond yields continue to rise from their recent anemic levels. On a fundamental level, rising interest rates may be less of a problem for REIT operators than a rash of three-to five-year leases that are currently expiring, Allaire says.

Most REITs have very "little floating rate debt," Allaire explains. But leases for office space that were signed between 1998 and 2000 at the peak of the bubble era are rolling over at a time when many regional markets are experiencing a "considerable reduction in market rents."

Over the longer term, a recovering economy and higher inflation rates should bode well for real estate but whether they can provide a cure for REITs, at a time when they are being dislodged as the income vehicle of choice, remains to be seen.

EnvestnetPMC Merges With Net Asset Management

In another sign of the consolidation that's taking place in the separately managed accounts industry, EnvestnetPMC and Net Asset Management have announced they plan to merge. The deal will create the largest independent platform for fee-based advisors, with about $11 billion in assets under management and 45,000 investor accounts, according to the companies.

The new firm will offer advisors Web-based technologies to provide separately managed accounts, mutual funds, multi-manager accounts, model portfolios and other fee-based investments. Proposal generation, asset allocation, investment research and back-office reporting and administration services will also be part of the unified platform, according to company officials. Terms of the merger were not disclosed.

The new firm will be named EnvestNet Asset Management and will be based in Chicago, where EnvestnetPMC is currently headquartered. Net Asset Management is based in Los Angeles. Industry observers say it's the latest in a series of consolidating moves that seemed to gain momentum after the acquisition of Lockwood Advisors by the Bank of New York Co. Another key deal, PFPC's purchase of AdvisorPort, was completed last year.

Scott MacKillop, managing principal of Trivium Consulting in Evergreen, Colo., says the mergers have been part of a maturation process in the industry. Smaller companies are looking for economies of scale, he says, while larger players are looking for efficient ways to roll out SMA services.

"You have a lot of these firms that have had a difficult time reaching critical mass," MacKillop says. "These smaller firms are typically under-resourced and need the big firms."

As is the case with Net Asset Management's Web-based technologies, the buyers in the consolidation frenzy are looking for technologies that are difficult to implement from the ground up, he adds.

Only 24% Of Americans Fear Outliving Savings

Surveys indicating that workers are lagging behind when it comes to saving for retirement seem to pop up on a monthly basis. Now another survey suggests, in essence, that America's workers need to pay more attention to these surveys.

The 14th Annual Retirement Confidence Survey, according to those behind it, paints a picture of American workers who are oblivious to their subpar savings and being too optimistic about the nest egg they will carry into retirement. The keynote finding: Only 34% of workers believe they may outlive their retirement savings.

This, says observers, flies in the face of numerous studies that have indicated Americans are underestimating their retirement needs in epidemic proportions. "This false sense of security is disturbing considering that even those individuals who have built a relatively large nest egg do not know how much income that nest egg will produce throughout their retirement," says C. Robert Henrickson, president of MetLife's U.S. Insurance and Financial Services business. "In short, Americans don't know what their savings are really worth."

The survey also found that 54% of those making $25,000 or less annually feel they are at risk of running out of money in their retirement. Overall, the survey found that 24% are very confident, and 44% somewhat confident, that they will outlive their retirement savings. Even among workers who have not started saving for retirement, 47% are somewhat confident of having enough money by the time they retire.

"America appears to be a nation of optimists when it comes to retirement, but for some people the retirement dream may turn into a nightmare," says Dallas Salisbury, president and CEO of the Employee Benefit Research Institute, which conducts the study with the American Savings Education Council and Mathew Greenwald & Associates.

The survey consisted of telephone interviews with 1,002 workers 25 years or older in the United States.