Cerulli: 529 Plans Looking at $120 Billion Increase Over Five Years

April 29, 2003 (PLANSPONSOR.com) - As college tuition rates continue to increase, 529 college savings plans are expected to swell to $145 billion dollars over the next five years.

The current annual growth rate of assets is projected at 40% between 2003 and 2008. Last year was especially good to college savings plans, as 529’s experienced a growth rate of 119% in 2002 to close the year out with $20 billion in assets , according to aCompetitive Outlook for 529 Savings Plansreleased by Cerulli Associates.

During this run up, 529s collectivelyadded more than 1.6 million new accounts and more than $10 billion in new contributions. Looking forward to the next five years, Cerulli anticipates the number of accounts will grow at an annual growth rate of 25%, to reach 11.1 million accounts by 2008.

However, the average account balance remains relatively low. For example,66% of total accounts have a balance that is less than $5,000 and 26% have balances between $5,000 and $20,000.Of the larger accounts, 6% have a balance that falls between $20,001 and $50,000 and the remaining 2% of accounts have balances exceeding $50,001. Overall, the average 529 savings plan has an account balance of $6,457. The very nature of lower account balances for the majority of 529 plans has caused 60% of 529 savings assets to be invested in age-based funds with static investment options capturing more than 20% of the assets.

Therefore, much of the expected increase is expected to due to increases in tuition rates that significantly outplace inflation: 5.8% at private institutions and 9.6% at public schools for the 2002-2003 school year. Further, 529 savings accounts had only a 4.3% penetration rate for children under 18 in 2002.

Also, a potential dark cloud looms on the horizon in the form of prepaid plans causing difficulties for many states offering a 529 plan. Many states pegged tuitions increases at 5% to 6% and anticipated investment returns of approximately 7% to 8% per year, allowing a plan to generate the guaranteed returns. However, continued volatility in the stock and bond markets, combined with negative economic conditions at the state level in the form of reduced funding for higher education, is resulting in a shortfall between the plan’s anticipated returns and the soaring price of tuition.

A full copy of the report is available for purchase at http://www.cerulli.com/report-529.htm .