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COLLEGE SAVINGS 101

Will state budget cuts hamper 529 plans?

Lori Johnston is a freelance writer in Georgia.

by Lori Johnston

State budget cuts shouldn't significantly impact the administration and marketing of 529 college savings plans, but programs to entice families to open 529 plans or increase their contributions might take a hit in states where the budget has come under the knife.

For example, a 529 matching-grant program in Michigan was cut because funding was not available. In previous years, the state provided a matching grant of $1 for every $3 of contributions made to a Michigan Education Savings Program account up to $200 for beneficiaries aged six or younger who are state residents and who live in a household with a family income of $80,000 or less. Meanwhile, a matching program in Kansas wasn't sacrificed.

But people aren't likely to see 529 plan sponsors offering that kind of incentive funding because state budgets are so stretched, says Jackie Williams, director of the College Savings Initiative, a joint project of the New America Foundation in Washington, D.C. and Washington University in St. Louis.

"You're probably not going to see expansion of a lot of 529 plans, like matching plans, which most states would like to be in the position of being able to offer, at least to the segment of their population that is low-income," she says.

States' budgets won't strain 529 management

On the plus side for 529 plans, there shouldn't be as much strain on the management and marketing of the programs as there might be on 529 incentives.

The main reason is that 529 plans administered by states are generally self-funded by fees generated through the program, such as application fees and annual fees, says Joan Marshall, chairwoman of the College Savings Plans Network, an association of states that administer 529 plans.

"The oversight of those plans is typically done with staff that's outside of states' general funding," she says. "(It is) not subject to state budget cuts."

Investment firms contracted by the state often handle the operations of 529 plans, so those services should continue at the same level, unless the state renegotiates the terms of those contracts, Williams says.

"People should not see any change in the staffing of call centers or any features of the program," Marshall says.

State officials who operate 529 plans say they've made changes to manage an increase in plan holders while trying to keep plan fees low.

"Beyond a shadow of a doubt, it's more economical for us if (our 312,000 direct customers) choose to interact with us online," says Mike Prescott, executive director of the Ohio Tuition Trust Authority, which offers the CollegeAdvantage 529 Savings Plan. "It allows us to give back to them in terms of lower fees. It absolutely helps us to be literally among the handful of (529 plans with) the lowest fees in the country."

The trend has been in the direction of fee reductions, not increases, Marshall says. She expects that to continue as assets build in 529 plans and competition among program managers remains strong.

State budgets aren't likely to cause a cut in the number of investment options because the 529 plans are competing for account holders. State 529 plan managers also want to ensure that investments being offered meet a host of criteria, including low fees, excellent performance and principal protection, Williams says.

In most states, the legislation creating the plans clearly separates 529 plan assets from the state's general fund, so Marshall believes it would be illegal in most states to increase fees to support the state's budget.

"If any plan was to do that, harsh public criticism would result and the plan would be more likely to lose assets than gain assets," she says.

At the same time, the marketing of 529 plans is shifting to cheaper methods. As more people seek information online, families and plan holders may see more news about their state's 529 plans coming through Internet advertising, social networking and e-mail.

Plan holders also might see more services directed to the Web. You might be able to perform more functions, such as changing your address or your 529 plan investment direction, online instead of calling a customer service representative or using snail mail.

The Utah Educational Savings Plan has made several 529 plan enhancements, including online withdrawals, quarterly statements and investment changes in the past year, and the changes are related to the savings they generate, says Lynne Ward, the plan's director.

The holdings, receives no funds from the Utah state budget. Instead of adding staff to handle the increase, it has found ways to use the Web to make it more convenient for account owners and keep overhead costs down.

"We're able to pass those (savings) along to our account owners in the form of lower fees," Ward says.

Posted August 6, 2010