MutualFundWire.com: Expect Subdued 529 Profit Growth

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Thursday, September 26, 2002

Expect Subdued 529 Profit Growth

TIAA-CREF and Fidelity were the two hottest sellers of 529 college savings plans in the first quarter of this year. The two firms easily out-ran number three seller Merrill Lynch, according to data collected by Boston researcher Cerulli Associates.

Top Five 529 Distributors Assets in millions of dollars
Firm	12/31 - 3/31	All 2001	2001 Rank
TIAA-CREF	$947	$1,818	1
Fidelity	$803	$1,365	4
Merrill Lynch	$455	$845	5
Alliance Capital	$275	$1,518	3
Putnam	$202	$1,740	2
Source: Cerulli Associates 529 Savings Plan Update

Notably absent from the list of the top-five providers was Capital Research & Management's American Funds. That product was not released until the first quarter of 2002 and did not have time to break the list. The survey covers 15 providers with 85 percent of 529 assets.

"American Funds is accumulating assets very quickly," confirmed Cerulli analyst Luis Fleites. "It will be interesting to see if they do break into the top five by the end of the year," he added.

Fleites also is keeping an eye on SSgA's Schoolhouse Capital. The Boston-based 529 specialist cut three distribution deals this year that should bolster its sales significantly.

Indeed, even with the declining markets, there appears to be growth for all to go around. Each of the top providers of 529 plans increased their assets during 2001, the researcher found. Over all assets in plans nearly tripled and reached $9.1 billion by the end of the year. The number of accounts also nearly tripled, hitting 1.46 million from just 556,000 at the start of 2001.

Though the outlook on growth is healthy, profits are another story. Assets in plans grew in line with the number of accounts meaning growth in average account size is slowing.

Assets in the average account grew just 10.7 percent to $6,267 in 2001 compared to 11.4 percent in 2000 and 84 percent in 1999. Fleites notes that many 529 investors are unable to find more than a few thousand dollars a year to contribute to the plan.

Fleites expects "subdued" growth in average account size in coming years. That may mean that the market will not be as profitable as some providers were hoping. Average account size, after all, is a far more important metric for profitability than total assets under management.

Fleites was unable to say if any firm in the 529 market is generating profits or break-out the industry's average cost structure. He did note though that providers are struggling with the cost side of their products.

Most recently, for example, the industry successfully lobbied the Internal Revenue Service to reinterpret a requirement that 529 providers guarantee the eligibility of distributions from plans. That requirement had meant that 529 providers needed to collect and maintain receipts submitted by account holders.

From the measure of average account size, Merrill Lynch appears to the best positioned. Its average account is $11,596. Meanwhile, market share leader TIAA-CREF may be the most challenged. It has only $5,256 in its average account. It also levies below-average fees on its funds, meaning that each dollar of assets produce less revenue. Fleites noted that one reason for the low average balances in the TIAA-CREF plans is that it sells directly rather than through intermediaries.

With the year-end marketing season quickly approaching, expect more vendors to watch this metric carefully now that most programs are in place.

Printed from: MFWire.com/story.asp?s=3568

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