Assets in 529 plans now more concentrated among several firms

The 529 college savings market is increasingly dominated by just a few players, and the barriers to entry for new contenders are getting higher.

Currently, 10 program managers oversee 90% of the assets in 529 plans, up from 80% 10 years ago, according to a report today from AKF Consulting.

“It’s harder for new companies to come in,” said Andrea Feirstein, the firm’s managing director. “It’s not impossible … [But] you’ve got to be extremely cost-competitive.”

Little has changed in the market share of the top four companies: Ascensus, American Funds, Fidelity and TIAA. But BNY Mellon's Sumday has recently become a bigger presence after entering the market in 2018, especially given its new role as Maine’s program director beginning in the fourth quarter of 2021, according to the report. That manager is replacing incumbent Merrill Lynch, which had overseen the state’s program for 20 years.

“That’s a big transfer of assets, and Merrill has been extremely successful in running the Maine plan,” Feirstein said.

In a statement from the company, Merrill said that “[b]ased on changes in the regulatory environment in recent years, we decided not to continue as program manager for NextGen 529.”

However, the plan “will continue to be available through Merrill. This change will have no impact on our clients or advisers,” the company stated.

The 529 plan market is potentially more difficult to break into than the 401(k) world, which has an abundance of small plans that can be eager to hire fintech providers. When states hire 529 plan managers, they aren't likely to consider firms that don’t have track records, Feirstein said.

Some incumbents appear to see a lot of opportunity in college-savings programs, while others are likely less interested in space given its regulatory constraints and customer service demands, she said. Over the past year, Fidelity has won new business with two states, becoming program manager for Oklahoma’s adviser-sold plan and for Connecticut’s direct-sold and adviser-sold plans, AKF’s report notes. And in addition to Maine’s plans, Sumday will take over as program manager for Oregon’s adviser-sold plan in the second quarter of next year.

AKF, which consults with numerous states on their programs, based its report on data from disclosure statements as of May 6 for 92 plans.

COST COMPETITION

Thanks in part to scrutiny from Morningstar, adviser-sold plans are being forced to compete on the same playing field as direct-sold plans, which typically have lower fees, Feirstein noted.

While costs have come down overall in college-savings programs, there will likely be a notable round of fee reductions this fall, when states review their plans and implement changes, she said.

Because direct-sold 529 plans tend to include low-cost index funds, they have had less wiggle room on investment management fees and thus have had to consider reducing program-management costs, Feirstein said. Adviser-sold plans, which predominantly offer actively managed funds, can reduce fees by switching to separately managed accounts or ETFs, she said.

At the end of 2020, there were about 8.5 million direct-sold accounts, an increase of 6.8% over the year, according to the report. Adviser-sold plans grew at a much slower pace, reaching 5.4 million accounts, up less than 1% over a year.

The college-savings market represented more than $421 billion at the end of last year, including assets in pre-paid plans, AKF noted.

FOCUS ON SUSTAINABILITY

College-savings plans increasingly have environmental, social and governance funds as investment options, according to AKF. Over the past year, four plans have added ESG options, bringing the total number of 529s that include them to 21, reflecting 26 investments across the industry, the report found. Recent states to add ESG funds include Alaska (for two plans), Florida and Minnesota.

This year, two states also sought to increase Covid vaccination rates by offering scholarship lotteries in the form of 529 accounts. In addition to several $1 million cash prizes for vaccinated adults, Ohio awarded a handful of full-ride scholarships to state schools for children ages 12 to 17. Oregon has a similar program, offering $100,000 scholarships through a drawing it held Monday, the results of which will be announced next Tuesday, AKF’s report noted.

AREA FOR GROWTH

The 2019 SECURE Act made 529 plan assets eligible for certain apprenticeship programs. That development could encourage more families to sign up for accounts, Feirstein said.

Given the dramatic rise in the costs of attending a four-year college, particularly for private universities, parents are often daunted at the price tag and don’t know where to start, she said.

The average 529 account holds about $27,000, she estimated, but that includes many accounts for students who are still years away from attending college.

“With the expansion to registered apprenticeships, a family doesn’t have to save that $100,000 to $200,000” for tuition, she said. “That may make them more comfortable about starting to save in the first place.”