Risk-averse parents saving for their children's college education are flocking to conservative, low-risk financial products, and Section 529 college savings plans are taking action as their assets decline.
Risk-averse parents saving for their children's college education are flocking to conservative, low-risk financial products, and Section 529 college savings plans are taking action as their assets decline.
More than a dozen state 529 plans are considering adding bank products to their investment mixes, according to a recent survey by the Lexington-Ky.-based College Savings Plans Network.
“The most appealing investment options in the 529 marketplace over the last several months have been those that appeared to offer some security or comfort to investors who can't quite forget the pain of 2008 market losses,” according to a report released today by AKF Consulting LLC of New York.
Those losses have contributed to a miserable period for the 529 industry, which saw assets slide 22% to $85.9 billion as of March 31, from $109.8 billion a year earlier, according to Boston-based Financial Research Corp.
As a result, low-risk options such as FDIC-insured bank instruments, money market funds, cash reserve funds and Treasury inflation protected securities are becoming increasingly important for 529 plans.
Ohio's College Advantage bank option, for example, launched in late 2007 and offering certificates of deposit from Cincinnati-based Fifth Third Bank, had grown 76% as of March 31 to $133 million, from $76 million a year earlier.
And in just four months, the Utah Educational Savings Plan's new savings account option, launched in February and backed by the Federal Deposit Insurance Corp., has attracted more than $30 million.
“Investors like the safety and the liquidity of the savings account, and they see it as a parking place for their investment until they feel more comfortable with the market,” said Lynne Ward, director for the Utah plan in Salt Lake City.
LOCKING IN LOSSES
But some financial advisers caution that investing in cash-oriented products may hinder investors' long-term need to fund the ever-growing cost of a college education.
“Low-risk investments for college may or may not be the right course of action, depending on the clients' funding ability and time horizon,” said Michael Steiner, a wealth manager for RegentAtlantic Capital LLC of Chatham, N.J.
“If you lock in a low-risk option with a low return, you're preserving your asset base but losing in real dollars,” he said. “You will not be keeping pace with the rate of inflation of college costs.”
Joan Marshall, executive director of the Baltimore-based College Savings Plans of Maryland and vice chairwoman of the CSPN, agrees.
“A careful review of investment options” was a higher priority for Maryland administrators than simply adding more low-risk products, she said. “Low-risk investments encourage people to lock in losses,” Ms. Marshall said.
“We want parents to carefully review their options with an eye to the future,” she said. “Low risk may be appropriate for a high-school-age child, but for younger children, parents have to balance a desire for safety with the increasing costs of college in the years ahead.”
SAFETY FIRST
Even so, “the effect of the market has been so overwhelming that people don't know where to begin to feel comfortable,” said Andrea Feirstein, managing member of AKF Consulting.
“Bank products are the ultimate in conservative investments and are a paradigm for 529 plans because they appeal to people who would never invest in the market and investors with children in college or close to college,” she said.
“The success of bank products in states such as Utah and Ohio tell us that the demand is there,” Ms. Feirstein said.
And more will be offered, adding to the 11 bank, 13 TIPS, 21 guaranteed-income and 50 assorted short-term options available in 87 different 529 plans cited in the AKF report.
A new money market fund, for example, will be offered July 1 in the Kansas Schwab 529 College Savings Plan.
The Virginia College Savings Plan's CollegeWealth money rate option will be re-launched Nov. 1 with wider distribution through a regional bank, and the state may offer CDs, according to Mary Morris, the Richmond-based executive director of the plan.
The Kentucky Education Savings Plan Trust is also seriously considering a bank CD product, said David Lawhorn, the Frankfort-based plan administrator, citing the popularity of Ohio's 529 plan CD.
He also noted the success of his state's Guaranteed Option, which is offered through New York-based TIAA-CREF's life insurance division and last year returned 3.54%, with assets rising to $8.8 million in April, from $5.2 million a year earlier.
Interest in low-risk investment options for college savings won't abate anytime soon, advisers said.
“Safety is definitely a major factor in what people are looking at, and as an adviser, it's the first thing you better tell them to consider in today's environment,” said Rick Darvis, executive director of the Plentywood, Mo.-based National Institute of Certified College Planners.
Even parents with young children and a longer investing time horizon are reluctant to invest in the market, said Mr. Darvis, who is also a financial adviser and certified public accountant for Darvis Petersen & Peterson LLC in Plentywood, Ky.
“Once you put your hand on the stove and get burned, you don't want to put it back. There's real skepticism out there,” he said.
“It's very tough to tell them the markets will come back over time,” Mr. Darvis said. “People don't want to be in a position where they may have to recover losses in college savings, and I don't blame them.”
E-mail Charles Paikert at cpaikert@investmentnews.com.
