North Carolina has added yet another fund to its burgeoning 529 College Savings plan line-up. This time the new fund is intended to protect investors from losses in the plan. The program last added investment options in January when it unveiled four investment choices for the new program.

The new fifth option is an equity fund with a wrap. The Protected Stock Fund carries a principal guarantee from MetLife. Steve Brooks, executive director of the North Carolina State Education Assistance Authority, explained that the option was added in response to some investors who have been "frightened" by recent stock market performance.

Investors in the fund are also guaranteed an annual return of three percent or seventy percent of the S&P 500 index return sans dividends, whichever is greater. Investors must remain in the fund for five years and must invest at least $1,000. When the five years ends the funds are automatically moved to a fixed income option.

From those terms, it appears that investors in the fund will be paying a steep price for the protection.

Assuming that the S&P earns an average annual return of 8.5 percent over the next five years (in-line with the 10 percent long-term average index return after subtracting today's dividends), MetLife will be taking a roughly 250 spread. In the defined contribution market wrap fees are charged as basis points and have typically been measured in the teens.

The above math is based on the stock market repeating its long-term history. If that history does repeat, investors in the funds are likely to see a return of nearly 6 percent range.

The product is also a new twist on an old theme for MetLife, according to said Judy Weiss, executive vice president, MetLife Retirement & Savings. The insurer is one of the largest provider of guaranteed investment contracts to qualified retirement plans with its Met Managed GIC product.

In this case North Carolina's National College Savings Program negotiated the contract with MetLife, which means that it receives the guarantee, not the individual investor. The structure of the contract and the fact that the guaranteed return does not include dividends presumably lowers the risk of the guarantee enough to allow MetLife to write the contract.  

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