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Tuesday, May 14, 2002

When 529s and SAs Collide

by: Tony Pennino

Is it possible for the two next big things to be bound together in one neat package? Delaware Investments sure thinks so. The firm went live with its 529 plan for the State of Hawaii on April 29, Dan Carlson, vice president at Delaware, told the MutualFundWire.com. The kicker is that the investment vehicles being offered in that plan are separate accounts.

"These is a separate account structure created by the state. There are seven unique portfolios available through the plan, each of them customized according to the needs of Hawaii. This allows Hawaii to change the underlying portfolios as needed. Most individuals who might want to utilize a 529 plan probably do not have the minimums needed to get into a separate account. This gives them the opportunity to do so," Carlson reported.

Hawaii's plan is available nationally. Delaware also recently closed a deal wherein it will provide services for Pennsylvania's 529 plan. That will have a different investment structure from Hawaii's; Calvert Funds will provide two socially responsible funds to that plan.

Looking ahead for the 529 business, Carlson sees an increase in competition. "Competition will create greater exposure and educational opportunities. The more competitive the space is, the more likely the story is going to get out, the better the products will be, the more you will reach the investor," the executive added.

"We are looking at assets in 529 plans growing two to three times current levels over the course of the year," he contended, "but you are not going to see the explosive growth you saw in mutual funds or 401(k) plans. There are only 50 states. This is a limited space."

Carlson further stated, "The nimble will survive, those with the capital and the skill sets. In three to five years, you will know who are the winners in market growth."

The executive does see an place for alternative investments as having room in the 529 world. But again he cautions that the life of the investment is approximately 12 years whereas the life of an investment in, say, a 401(k) plan is around 30 to 40. "That will affect how people choose their investment options."

He also feels that 529 plans are going to have an impact on the world of employee benefits. He foresees that employers will offer one -- or, perhaps, even two -- to their employees. Carlson further reported that the presence of a 529 plan helps with 401(k) sales. "They help in building the confidence of the employer. For Delaware, we have the 529 plans for two states. That acts as a kind of endorsement for our offerings across the board. It is difficult to measure, but it certainly gives the employer a heightened sense of confidence in our product," he concluded.

Any last thoughts on 529s? "Stay tuned, more to come," Carlson responded. 

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