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What Parents Want:
Parental Views on College Savings Good News for Stable Value

Once little-known and little-noticed, 529 plans are fast becoming as indispensable to college savings as 401(k) plans are to retirement savings. 529 plan assets have mushroomed over the last couple of years to nearly $11 billion—a 70% increase since Spring 2000—and all signs point to continued explosive growth:

• New tax incentives, such as tax-free qualified withdrawals and enhanced tax-free rollover provisions, kicked in on January 1, 2002.
• All 50 states, plus Washington DC, have passed legislation enabling a 529 plan; 47 states currently have in place a savings plan, a prepaid tuition plan, or both.
• Tax law now allows private institutions to sponsor 529 prepaid tuition plans.
• The majority of states have partnered with major investment companies who have the resources and capability to market and distribute state plans nationwide.

The future is indeed bright for college savings plans. And that means there’s a great opportunity for stable value to grow right along with them, as an integral component of the 529 investment mix. Those of us who work with stable value every day know that its growth and safety characteristics fit well within the asset/liability profile of 529 plans. And states that have already integrated stable value into their plans, such as the Commonwealth of Virginia, have seen the excellent results it can provide. Diana Cantor, Executive Director of the Virginia College Savings Plan recently stated, "Since the stock market's downturn, our portfolios have outperformed those of most other state college savings plans due in large part to the fact that we have stable value in our plans.”

But if the stable value industry is to take full advantage of the growth opportunity the 529 market provides, states, program managers and participants must all be better educated about stable value and its benefits.

Survey Says

As part of that education effort, AEGON Institutional Markets commissioned Yankelovich Partners/Harris Interactive to conduct extensive interviews with 510 parents of children under age 18 in order to discover their specific attitudes and behavior toward saving for their children’s college education expenses.

The survey found that nearly 9 in 10 parents—87%—believe that it is “extremely” or “very” important for their children to go to college. Eighty-six percent of respondents say they are wary of doing something to risk their accumulated principal. Clearly, the vast majority of parents view college savings as a serious responsibility—a promise they make to their kids that they don’t want to risk breaking.

Given the seriousness with which they view college savings and the shorter investment horizon compared to retirement savings, it’s not surprising that parents tend to have a low risk tolerance:

• Three in five parents—over 60%—describe themselves as “conservative” investors.
• Eighty-five percent of respondents believed that some investments are too risky for their children’s education fund regardless of the potential returns.
• Eighty-seven percent wish they could have a safe investment for college costs that they would not need to worry about.
• Fifty-seven percent worry about the effect of stock market fluctuations on their college savings; however, an identical percentage agreed that a more “aggressive” investment strategy is fine if college is well into the future.

Other key findings:

• Most parents wish they were more knowledgeable investors. Seventy-seven percent wish they knew more about how to invest for college. A similar number, 74%, say they know only some or very few of the things necessary to make good investment decisions. And just five percent say they know “everything” they need to know to make good investment decisions.
• Most parents have already started saving. Two-thirds already save for college expenses; however, just two in five save on a regular basis. Not surprisingly, a significantly greater number of respondents with household incomes above $50,000 are saving for college—78% versus 52% of those earning less than $50,000.
• Parents use a variety of savings vehicles. Slightly more than half use bank savings accounts, while just under half use mutual funds and nearly two in five use savings bonds. Interestingly, only eight percent of respondents had heard of 529 plans and only one percent actually use them.
• Once started, most parents do not change their investment strategy. Seventy-two percent have stayed with the same investments for their children’s college funds, regardless of performance. And, given a devaluation in their college portfolio’s value, four in five parents say they would either leave the money alone or move it into a more conservative investment.
• Parents are worried about tuition inflation and underestimate college costs. Nine in ten believe tuition costs will be “astronomical” by the time their children reach college age. Yet, most also believe they will need to save an average of only $45,500 for each child. Two in five parents assume they will never be able to save enough to send their children to college.

In sum, parents understand the importance of saving for college; however, they lack accurate knowledge about college costs and how to invest to meet their goals. They are conservative, but they also need growth. Many of the investments within their risk tolerance, however, fail to generate adequate returns, while more aggressive strategies subject savings to unwanted volatility.

These findings suggest that 529 plan state sponsors and program managers have significant challenges ahead in better educating parents about 529 plans and providing an optimal range of investment options that meet their needs.

The findings also confirm that the 529 market represents an excellent new growth opportunity for the stable value industry. Many of the parental needs and concerns identified by the survey can be effectively addressed by incorporating stable value into the 529 investment line-up.

Of course, that means the stable value community has its own significant challenge ahead: educating states and program managers alike about that very fact.

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