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529 Plans Retain Allure for Stable Value Providers

It isn't often that entire new markets open up for any product, but that's what's happened for Stable Value Funds over the past few years as states across the country have launched dozens of new 529 college savings plans. Created by the Small Business Jobs Protection Act of 1996 and enhanced by the Economic Growth and Tax Relief Reconciliation Act of 2001, 529 plans are savings vehicles that investors can use to save for educational expenses. Investments grow on a tax-deferred basis and qualified withdrawals from the plans are not subject to federal income taxes. Many proponents believe Stable Value funds are a perfect investment for 529-plan accounts, especially in cases where the intended beneficiary is only a few years away from starting college and other more volatile investment options, especially equities, could be considered too risky.

Considering that the market for student loans is $50 billion annually, the opportunity in the 529-plan arena is substantial, says attorney William Montjoy, who from 1991 to 1994 was the founding chairman of the College Savings Plans Network. Today, in addition to running a private law practice, he also serves as general counsel of the Global Education Group that has US offices in Miami and provides private prepaid tuition insurance to foreign nationals. Montjoy says that while 529 plans are growing rapidly, they still constitute an immature market that is complex and confusing to many investors. Nonetheless, Stable Value funds have proved to be a popular investment option in the plans among the early adopters who have already opened accounts.

Greg Wilensky, a vice president and fixed income portfolio manager at Alliance Capital Management, joins Montjoy in the 529-plan discussion. Alliance manages a Stable Value investment fund for the 529 plan sponsored by Rhode Island. Known as the Collegeboundfund, assets in that plan grew from $10 million in October 2000 to $2.5 billion by September 2002 making it the largest single 529 savings plan in the country, Wilensky says. At that time, he adds, his firm's Stable Value fund accounted for about 5% of the plan's total assets. However, new inflows into the Stable Value fund were on the upswing; by the end of the third quarter, the Stable Value fund was attracting more than 25% of all new contributions to the plan. "The money's coming in faster every week," he said. "Part of this is being driven by current market conditions, but I think it's something that's going to continue."

Speaking to investment professionals in the audience who might be interested in winning a 529 plan mandate for their own firm, Wilensky explains that Alliance first had to help Rhode Island state officials understand how Stable Value works and sell them on the benefits of Stable Value investing. He said Alliance also had to work closely with the companies that would be providing the wrap contracts for the plan's Stable Value Fund to make sure they were comfortable with the opportunity. Those contracts back up the Stable Value fund's book-value guarantee to investors, and the wrap issuers naturally had limited underwriting experience in the 529 marketplace.

Despite the hurdles, the 529-plan market looks to be well worth whatever effort the Stable Value industry puts into it. Citing projections that the market will grow from $10 billion last year to $16 billion this year and $140 billion by 2010, Montjoy expresses confidence that even those lofty numbers would be exceeded, since all previous projections have also proved low. "We've always undershot where this thing is going," he says.

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