3 Product Trends in 529 Plans

By Paul Curley, CFA | paul.curley@strategic-i.com | June 11, 2019

3 Trends in College Financial Planning for Product Managers as of 529 Day 2019

On May 29, 2019, Strategic Insight hosted a webinar for 529 Day in front of a live audience in New York City and for online participants. The goal of the webinar was to build awareness, understanding and prioritization of 529s and ABLE, and you can view the replay here. This is an important goal as we can see in our first product trend in Exhibit 1 below from the Strategic insight 529 Industry Analysis 2019 that 41% of parents are not saving for college and 32% of parents are non-529 college savers. Inversely, 59% of parents are saving for their children’s college, and among those, 27% are saving with 529 plans and 32% are saving without 529 plans. Therefore, parents have an opportunity to save and save more efficiently with 529s plans.

Exhibit 1

The second product trend is the movement from 529 prepaid plans to 529 savings plans, which parallels the broader financial service industry trend from defined benefit to defined contribution products and services. While they can and typically are used together to produce similar return characteristics of a fixed income and equity portion to a portfolio, with the 529 prepaid plans acting more similar to a fixed income portfolio and 529 savings plans acting more like an equity portfolio, data in Exhibit 2 below reports a usage trend from 529 prepaid plans to 529 savings plans. For example, 529 savings plans increased assets by 6.2% and accounts increased by 4.7% from 1Q 2018 to 1Q 2019, while 529 prepaid plans decreased assets by 2.5% and accounts decreased by 6.4%. Therefore while 529 plans overall (including both 529 savings and prepaid plans) have been increasing assets by 5.5% and accounts by 3.8%, there is divergence in momentum by product type with 529 savings plans gaining momentum and 529 prepaid plans reporting decreasing levels of momentum.

Exhibit 2

The third product trend has been the transition from age-based glide paths to enrollment date glide paths. While age-based glide paths provide asset allocation based on the age of the beneficiary, enrollment date glide paths provide asset allocation based on a certain date in the future such as an expected date of enrollment or usage of the assets. This pivot by the industry aligns with the recent expansion in qualified distributions at the Federal level and at some states from higher education to K through 12 tuition as well. (For a list of states that allow qualified expenses from K through 12 tuition, click the link here). In other words, product providers are adjusting their glide paths to align with the broadening usage of 529 plans. For a list of 529 program managers that have implemented this product development as of publication of this article, see the list here:
• Advisor-sold plans: American Funds, Ascensus, BlackRock, Fidelity Advisor, Invesco, Legg Mason, John Hancock, Putnam
• Direct-sold plans: Ascensus, Fidelity, Florida, OTTA, Sumday Administration, TIAA* (Pending), T.Rowe Price, Virginia
Based on industry trends and outlook as of publication of this article including recent Federal legislation such as the SECURE Act that would further expand the list of qualified expenses for 529 plans, this third product development can be expected to expand further across more 529 product providers and 529 plans.

Therefore, product providers and distributors should note the continued work to build awareness of 529 plans, the shift from defined benefit to defined contribution products, and the shift from age-based target date line-ups to enrollment date line-ups. These trends suggest that the product continues to evolve to align and grow with the demand of parents seeking a solution to their college financial planning needs.