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Friday, December 16, 2005

College Savings Shakeout is Already Starting

by: Sean Hanna, Editor in Chief

The number of players in the 529 plan industry is already starting to contract. Like pimples on a teenage face, contraction in the financial services industry is an obvious sign of coming maturity. Unfortunately, for the fund firms that flocked to the college savings plan market in hopes that the were getting in on the next 401(k) plan boom while it was on the ground floor, 529 plans are not yet half a decade old.

529 plans hold just $72 billion in assets and cover just 7.6 million accounts, far short of the $2 trillion in 401(k) assets in 50 million plus accounts. In further contrast, 401(k) plans had already gathered $190 billion in assets by 1987, the fifth year after the first plan was created.

The latest bad news is coming from Wyoming. Friday, the Wall Street Journal reported that Wyoming is mulling over whether to shutter its Merrill Lynch-administrated 529 program (it would be the first state to do so). The state board would close the plan because it failed to attract enough assets to create cost efficiencies. Those who are already participants in the plan would be able to move their accounts to the Colorado plan that is administrated by Vanguard.

Currently the plan holds just $16.8 million in assets for 1,379 accounts. At that level it is virtually impossible for the plan to be profitable no matter what the expense level it levies. The plan now charges 90 basis points for administrative expenses. Even at that relatively high level, the total fees come to just more than $151,000 -- or just under $110 per account.

The paper also points out that Vanguard has become the behemoth of the college savings plan market with $10 billion of assets, or about 14 percent of the market. New York, for example, dropped TIAA-CREF (itself known for its low cost products) and hired Vanguard when TIAA-CREF refused to match Vanguard’s quote on administrative services.

More recently, in September T. Rowe Price reduced its fees in charges the Maryland 529 plan when that contract came up for renewal.  

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