Nebraska's college savings plans are giving worried account holders a federally insured investment option so parents and grandparents don't have to cringe with every market plunge.
Both Nebraska's adviser-sold and direct-sold Section 529 plans are announcing today that they will offer an FDIC-insured bank investment option through the First National Bank of Omaha, which is the program manager for the state's plans. The rate of return starts at 1%, though that amount will be reviewed monthly based on short term interest rates. The only fee will be a total annual asset-based fee of 20 basis points, which is lower than the annual fee for the plans' other investment choices.
“It will be good for account owners who may not feel comfortable investing in the stock market, those who prefer conservative investments or for those who are close to needing the funds to pay for college,” said Deborah Goodkin, a managing director of First National Bank of Omaha and program manager for the state's plans.
Nebraska's Section 529 plan joins 18 other plans in 15 states that offer an Federal Deposit Insurance Corp.-insured investment choice. The bulk of these plans added the FDIC option after 2008, when college savings plans were criticized for heavy losses and a move to more-conservative investment options was encouraged.
The state's direct-sold Nebraska Educational Savings Trust plan has $1.1 billion in assets held within 64,000 accounts and its NEST adviser-sold plan has $584 million in 59,000 plans.
“Many states like the FDIC-insured option because they know a lot of parents and grandparents are putting their college savings in the bank,” said Joe Hurley chief executive of Savingforcollege.com. “However, it is difficult for a program manager to offer a bank product unless they already have a bank affiliate.”
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Financial adviser Tom Posey of Posey Capital Management Inc. isn't too excited about such offerings within college plans.
“It's really not very useful because of the low returns,” Mr. Posey said. “When you're investing with 529s, the whole idea is to put money away every month for a long time horizon. Over that time period, the markets have always done pretty well.”
He said he usually advises clients who have only a few years before they need the money for college not to open a 529 plan but just to put the money in the bank. The tax shielding isn't worth that much, considering the extra risk clients have locking their money up in a 529 plan.
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First National Bank has been planned to offer such an option since taking over management of the college savings plans for the Cornhusker state in December 2010. But the recent gyrations of the stock market have made it even more pressing, Ms Goodkin said.
“It's even more important now to offer this, given the current economy and variability in the stock market,” she said.
Financial professionals who have clients in the adviser-sold plan will not get paid any loads, commissions or trails on the assets that are put into the FDIC–insured option, she said.
In fact, both the state and First National cut their own standard annual fees for those who invest in the FDIC-insured option so they could get the cost down to 20 basis points for investors.
