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Home > Library > Stable Times > Volume 5, Issue 1  The quarterly publication of the Stable Value Investment Association First Quarter 2001 • Volume 5 Issue 1 A Budding SV Opportunity: '529' College Savings PlansBy Aruna Hobbs, AEGON Institutional Markets In a nutshell, 529 plans are state-sponsored college savings programs that allow parents, and other donors, to accumulate college savings tax deferred, while providing access to an array of investment options - not unlike the retirement savings marketplace. These state-sponsored plans are enjoying near celebrity attention—3,000-plus articles in the last six months! As the pricetag for a decent college education keeps escalating, America's biggest financial concern next to having enough money to retire on is paying for a child's higher education. Not only newsworthy, these plans are poised for phenomenal growth potentially: assets are conservatively projected to surpass $100 billion in less than 10 years, with enthusiasts predicting an upside potential of $1 trillion. All but two states have adopted the legislation and current assets of $8 billion plus are growing rapidly. While the plans vary from state to state, the menu of options is growing all the time as states compete for assets. Parents can shop for the best state plan – they don't have to settle for their home state (although the state tax incentives are often better.) What is shaping up to become the next boom market in savings plans is a perfect fit for stable value. When you ask the question, "What do parents want in a college savings plan?" The answer is a theme long familiar to stable value folks – growth in accumulated assets with low risk. Parents with college-bound children may be particularly concerned with the safety of their principal as they approach tuition payment time. Stable Value – a perfect fit. The similarities between saving for college and saving for retirement are striking. As children reach college age, (i.e. 'retire') it becomes critical to preserve the hard-earned accumulated savings and gravitate towards the more conservative 'safe' options. This is similar to a 401(k) participant approaching retirement age. The liability horizon of a 529 plan is not unlike a 401(k) plan, only shorter and to some extent 'stickier.' They are stickier than 401(k) plans, because typically 529 plans don't allow for participant elected transfers between investment options. In fact, Federal tax law precludes 529 plan investors from making investment changes once they join a program. However, many college savings plans offer a pre-mixed asset-allocation progression based on the child's age. By design, the migration is automatic and not participant directed. So the closer the child is to college age, the more conservative is the investment mix. Clearly, stable value would be a great addition to these pre-mixed funds. Stable value has enjoyed popularity in the defined contribution realm for the same attributes. As the 529 market gains rapid momentum, the time is ripe to bring the 'value' behind stable value to life. These new frontiers present for us an opportunity to expand stable value as an asset class. This means an industry-wide marketing and education initiative, which believe it or not can be accomplished with little input of time and resources. It could be as simple as spreading the word - by asking around in one's own firm; or approaching the local State treasurer about stable value in their line-up of options or talking to the appropriate legislator. To build recognition in this promising new market, the SVIA has posted on its website an Educational Module tailored to the 529 application – i.e., a 529 Stable Value 101. Member firms should feel free to use this tool to support their efforts in this market. AEGON will facilitate the website linkage to key college savings administrators such as the National Association of State Treasurers (NAST), College Savings Plan Network (CSPN) and others. As the market infatuation with equities subsides (we think) this may be yet another arena to promote the value of conservatism and stable investments. Undoubtedly, there will be issues to resolve, structures to design, doors to open but we have to knock first. An industry call for attention is a lot more powerful than any firm trying alone. As the adage goes, 'It takes an industry, to build a market.
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