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Stable Value Gains In College Savings Market

A couple of years ago, the college savings market was uncharted land for Stable Value providers. Many believed the potential for Stable Value was a perfect strategic fit for college savings investments - and a new growth market for Stable Value.

Today, Stable Value has become a popular investment option in this booming market, with plenty of room for growth and product evolution.

Thanks to generous federal tax incentives last year, the entire college savings marketplace has seen explosive growth, accompanied by many new entrants and intense competition among plan providers. Industry growth

Let's take a closer look.

Today, all 50 states offer 529 college savings plans. More than 4 million accounts have been established since year-end 1999. In that same period, 529 assets have grown nearly 300%, to some $23 billion, with most of that growth occurring in the last two years. Current industry growth projections put 529 assets at $100 billion by 2010, but extrapolating from the current growth rate, we think assets could grow to more than $200 billion in the next seven years. Given those statistics, it's no surprise that news stories on this market abound.

Most important: the number of states offering a Stable Value or guaranteed option has increased by a whopping 320% -- to 21 up from 5 - and the number is growing all the time. In 1999, to the best of our knowledge, only TIAA-CREF provided any type of Stable Value or guaranteed option in this market. Today, several firms are providing Stable Value to the 529 market, including AEGON, Alliance, INVESCO, Prudential, Putnam, Strong and Travelers, to name a few. Many managers are currently in active discussions with various plans.

Stable Value is typically available as a standalone option within 529 plans, but there's room for much more growth. Most college savings plans offer a pre-mixed asset-allocation progression based on the child's age, which is a popular choice. The closer to college age, the more conservative the allocation. Right now, a typical conservative allocation might include 50% bonds, 30% money market funds, and 20% equities. Stable Value would be a great addition to these pre-mixes in lieu of unwrapped bond funds and money market funds for the clear advantages it provides over both.

Anecdotally, 529 plan administrators and money managers tell us that plan participants as well as the financial advisors who are marketing the plans are clamoring for safe, principal-protected investments, creating excellent product development opportunities for Stable Value providers.

While individual company efforts have shaped the marketplace, the SVIA has helped raise the profile of Stable Value within the college savings market. Two years ago, the SVIA board adopted an action plan for this market, which included:

• An illustrative, educational piece on Stable Value for college savings plans, available in print and at the SVIA website;
• Hosting a booth last year at the National Association of State Treasurers annual conference to raise Stable Value visibility;
• Raising awareness within our own industry through such articles as this in Stable Times, as well as giving college savings a prominent role at our annual conference.

These efforts, combined with those of individual members, have lifted Stable Value from anonymity into a highly sought-after asset class within 529 plans, for the same benefits as in the 401(k) world.

Looking ahead a couple of years, we can expect to see:

• Stable Value in all 50 states' 529 plans, and increasingly included in age-based portfolios;
• More efficient markets;
• Possible regulatory sand traps for 529 plans - President Bush's Lifetime Savings Account proposal in particular (although most pundits believe implementation in its current form is remote).

It still remains to be seen how the regulatory and environmental factors play out, but the future for Stable Value in the 529 area continues to be bright.

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