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529 Plan Competition Heats Up

Firms in the 529 space respond to concerns with conservative products, new approaches.
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BOSTON (TheStreet) -- Tapping into the frugal mood and conservative approach of consumers burned by market losses and ongoing volatility, major players in the 529 college savings plan space -- among them Fidelity Investments, T. Rowe Price (TROW) - Get Report, Vanguard and Putnam Investments -- have announced new products, added features and reduced costs.

At the height of the market's freefall in 2008, an estimated 90% of 529 plans suffered losses, some shedding upward of 40% of their value, a major setback considering the abbreviated time horizon for college-based savings.

The skittishness of burned investors has led to increased competition among providers as they seek to reassure the marketplace and lay claim to assets. One strategy is to offer investors more conservative options.

Last week, Fidelity Investments announced the addition of a "bank deposit portfolio" across its five direct-sold 529 college savings plans, including those it manages in New Hampshire, California, Massachusetts, Delaware and Arizona.

The portfolio is made up exclusively of a deposit into an FDIC-insured, interest-bearing, Negotiable Order of Withdrawal account and is designed to preserve principal. The rate of return is indexed to the federal funds effective rate.

Fidelity is also offering gun-shy 529 investors the option of conservative portfolios made up of various fixed-income investments.

Last month, Vanguard announced that it will reduce expense ratios on its Vanguard 529 College Savings Plan by nearly half on some portfolios. The expense ratios, which become effective Oct. 15, will affect more than 100,000 clients and represent $8.5 million in annual savings.

Vanguard has also partnered with

College Savings Iowa

to reduce its all-in plan expenses by one-third. In August, the New York 529 Direct Plan, the nation's largest direct-sold 529 college savings plan, cut its expense ratios in half.

This past summer, T. Rowe Price and the state of Alaska announced that the program fees for the T. Rowe Price College Savings Plan would be reduced by a third and the annual account fee waived for many investors.

On Friday, Putnam introduced an absolute return based 529 plan it describes as the first of its kind. The adviser-sold Putnam 529 for America plans are designed to target positive three-year returns above inflation, as measured by T-bills, and offer potentially lower volatility than more traditional mutual fund investments.

There will be four types of plans, distinguished by return goals of 1%, 3%, 5% and 7% better than U.S. Treasuries over three years.

The absolute-return strategy, gaining increasing acceptance by Main Street investors, has long been popular among the wealthy, hedge funds and university endowments. These portfolios often achieve their goal by mixing traditional stock and bond holdings with alternative assets and strategies such as options, short selling, derivatives and currency hedges. The Putnam funds include -- from greatest return potential to lowest -- focuses on equities, bond funds, balanced funds and short-term debt.

The plans also offer actively managed portfolio options tailored to risk tolerance, including a target-date approach that adjusts annually, becoming more conservative as a child approaches college age.

To encourage participation, Putnam will waive sales charges for participants who transfer funds over from existing 529 plans, as well as hold annual maintenance fees until 2012.

With the cost of a college education rising several times faster than the rate of inflation, "saving for college is already one of the biggest financial challenges families face," says Putnam CEO Bob Reynolds.

"Whenever you have a target period, whether it is retirement or a point when you need to utilize your college savings, the risk of volatility is maximized the shorter your time horizon," he says. "The sequence of returns is so critical. If you can have two investments accomplish the same average return, but your superior returns are early in that period and your bad returns are late, you have less money than if the opposite happens. Protecting against volatility and providing consistent returns is critical for a college savings plan."

Reynolds sees increased competition as a byproduct of economic conditions.

"Flows have slowed down for 529s and a lot has to do with the market," he says. "I think the demand has been there, but, with two major downturns within a decade, investors today are much more sensitive to the fact that volatility is not your friend. People are much more careful and conservative, and they care about what their options are. Some providers in the 529 space have even put bank accounts in as potential options. To us, that's a little extreme. But I think it speaks to what we are talking about."

Reynolds says that those in the 529 space need to work closely with customers and financial advisers to overcome negative perceptions fostered during the recession.

"With 38 million American families having children under age 18, this is still the best way to save for college," he says.

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"What has been very clear since 529 plans first came out is that this is a product that is sold, not bought," he adds. "Eighty percent of the 529 plans in this country are sold through advisers. Advisers have had a broad set of issues on their plate, but the better you can make this product, the easier to use you can make it, the more success you should have. We are putting a lot into the technology and service side of our 529s, to make them more easily understood by not only the people that utilize them, but also by the advisers themselves. If you can make them less complex, provide more simple options and the tools to support them, I think you will have a lot of success."

The new funds are made possible through the sponsorship of the state of Nevada, which offers several direct-sold 529 college savings plans, including the Upromise College Fund 529 Plan, the Vanguard 529 College Savings Plan and the USAA College Savings Plan. Anyone can invest in the plan and use the proceeds to attend a school in any state.

Reynolds describes the partnership as "a perfect fit."

"We were approached by several states, but I think Nevada is known for having a very flexible plan and being leading edge," he says.

For Putnam, the fund launches may be all the more important considering its recent loss of Ohio's Section 529 college savings plan to rival BlackRock.

Putnam's absolute-return funds, launched in January 2009, have thus far attracted $2.5 billion in assets. In total, it has $113 billion in assets under management.

-- Written by Joe Mont in Boston.

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