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Tuesday, December 14, 2004

529s Look Evergreen

Reported by Theresa Sim

State Street's exit out of the 529 business, while cautionary, doesn't make sense for all money managers. One among the 529 optimists is Boston-based Evergreen Investments.

The business, for Evergreen, is both currently profitable and "has a lot of potential going forward," maintains Rich Gershen, head of business strategy in Evergreen's Risk and Product Management group.

The provider recently took over program management of several formerly Schoolhouse Capital-managed New Mexico 529 plans, with the help of OppenheimerFunds. Evergreen will manage what was formerly New Mexico's Arrive and CollegeSense plans, both nationally available, advisor-sold plans.

According to Gershen, offering 529 plans is "very consistent with Evergreen's approach to be more and more solution oriented."

Although State Street cited lack of scale in quitting the business, the plan size is big enough for Evergreen. "We looked at it as an opportunity to get a little bit more scale," says Gershen." Evergreen, which was not administering a 529 plan before the Schoolhouse deal, will manage the plan. In taking over the administration, Evergreen will continue to preserve both Schoolhouse and Evergreen's existing vendor relationships. For instance, Boston Financial Data Services (BFDS) will still process transactions for the New Mexico plan, says Gershen.

And for Evergreen, the costs of distributing 529s is not a stand alone cost: "our wholesaling force is already out there selling [other] investment products," said Gershen. Being a program manager for 529s is also "synergistic" with being a fund manager, says Gershen.

"We have a very broad distribution network, and we try to provide solutions to people in a number of areas." Gershen maintained that the product is both profitable standalone as well as beneficial to Evergreen in its place as part of a product lineup.

But that does not mean that Evergreen is ready to sponsor another state. Gershen says that firm has not yet considered managing another state's program, indicating that Evergreen is unlikely to go the Schoolhouse route.

It may be too early to sell the plans short for other reasons. Because the plans are still relatively young, people have not reached the "plateau" of accumulation, says Gershen. Consumers are not yet fully knowledgeable about the plans because of their complexity, he adds. The industry might see other changes, in the form of consolidation, more consistency and uniformity in products, and more consistent regulation up ahead.

And part of the "failure" of 529s might be that the industry's expectations have been too high. "I think people had incredible expectations," says Gershen, who adds that the product has nevertheless "met [customers'] expectations."

But the future is not all rosy for 529s. A change in social security or the tax code could create disincentives for existing tax-deferred or tax-exempt savings vehicles in favor of new vehicles. "There's a lot of talk…about President Bush's proposals…but as things stand now, I don't think you can beat [529s] as a vehicle," said Gershen. No other vehicle that is currently offered "allows you to save tax exempt versus tax deferred," notes Gershen. 

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