By Jessica ToonkelOct 18 (Reuters) - The California State Treasurer’s
decision last week to shut down its adviser-sold 529 plan is
the latest evidence that the once popular option is losing
ground, experts say.For starters, these plans are already losing market share
to their direct-sold counterparts — giving up 9 percent market
share in the past five years. And experts predict that this
trend will pick up pace as regulation of the brokerage industry
expands.On Oct. 12, the ScholarShares Investment Board, which runs
California’s 529 plan, announced it had decided to drop the
plan because it was not able to find a manager that “could
deliver a competitive plan for our account holders,” according
to a statement by Joe DeAnda, a spokesman for California’s
treasurer office.The change came as California switched providers from
Fidelity Investments to TIAA-CREF. TIAA-CREF did not bid to run
the plan.”We bid on the direct plan because that is where we feel we
have the most expertise,” said Doug Chittenden, senior vice
president of institutional product management at TIAA-CREF.
California’s direct 529 plan has $3.9 billion in assets,
compared to the adviser-sold plan, which has $283 million.Currently, 30 states have both an adviser-sold and direct
option, according to FRC. When 529 plans came to the forefront
in 1997, adviser-sold plans — which are sometimes available
nationwide and are sold by brokers who receive a commission —
largely drove the growth of the market.But that has changed. While adviser-sold plans accounted
for 60 percent of 529 savings plan industry assets in 2006,
they accounted for only 51 percent of assets as of the end of
2010, according to Financial Research Corporation.VICTIM OF SUCCESSTo some extent, adviser-sold 529 plans are a victim of
their own success, industry officials said. As the industry has
raised awareness about how these programs work, more investors
feel comfortable investing in them directly.States also spend more of their marketing dollars promoting
direct-sold plans, which may be another reason that market is
growing, said Laura Lutton, a Morningstar Inc. analyst.What’s more, a growing number of advisers are telling
clients to invest in their in-state direct-sold plans, forgoing
any commission or fee.Twenty-three percent of advisers recently surveyed by
Financial Research Corp said they always recommend their
in-state direct 529 plans for clients, while 49 percent said
they sometimes do.Direct-sold plans are less expensive than adviser-sold
plans, said Paul Curley, a 529 analyst at FRC. The average fee
for an adviser-sold plan is 1.14 percent. Direct plans, average
0.58 percent, according to FRC.Robert Oliver, an Ann Arbor, Michigan-based fee-only
adviser, always directs his clients to the in-state plan, which
costs 0.35 percent and offers a tax break to residents. But he
still meets prospective clients who have been sold out-of-state
plans by other brokers, he said.”A lot of clients are being sold plans because the adviser
gets a commission off of them,” Oliver said.REGULATORY CHANGESGiven the regulatory landscape, that is likely to change,
Hurley said.The securities industry expects the SEC to soon propose
rules that would harmonize legal standards of care between
brokers and registered investment advisers. That would mean
that brokers could be required to act as fiduciaries, acting in
the best interest of a client, a standard that RIAs already
follow.One change that would bring: Advisers selling out-of-state
plans, when their clients can get a tax deduction for the
in-state option, would have to provide even more disclosures
about why they are choosing an out-of-state plan for the
client, Hurley said.But advisers won’t be shut out entirely, experts say.”When we talk to account holders, the top three ways that
investors learn about 529 plans is word of mouth, advisers and
the Internet,” said Joan Marshall, chair of the College Savings
Plan Network and executive director of Maryland’s college
savings plan. “A lot of people really want the assistance of
advisers when making these decisions.”
Most of the savings would come through changes to the conditions of participation in the government health program for the elderly and disabled. For example hospitals would no longer need a dedicated director of outpatient services and could contract out laboratory and radiology tests.The Department of Health and Human Services (HHS) joins other federal agencies — including Agriculture, Housing, Interior and Transportation — that are taking steps aimed at lightening the regulatory burden and save money.Obama, who faces a tough 2012 re-election fight, called for the regulatory review in a January executive order, seen as an effort to improve his relations with the business community.The U.S. Chamber of Commerce and other business groups have been skeptical about the overall initiative. They say other potentially costly regulations could quickly undercut any savings.HHS said the rule changes it was proposing would save hospitals, doctors and other healthcare providers $1.1 billion in the first year and $5 billion over five years, and do so without cutting how much providers get reimbursed.”The rules would also remove many outdated billing practices, saving physicians time and money,” HHS Secretary Kathleen Sebelius told reporters.HHS also proposed a Medicare Regulatory Reform effort to eliminate conflicting, duplicative, overlapping or outdated administrative requirements and procedures. Health officials said getting rid of unnecessary paperwork and procedures would lead to reallocation of time but not job cuts.To read the proposals, see: r.reuters.com/nuj54s and r.reuters.com/vuj54s .Medicare could face a bigger overhaul as part of a deficit-reduction effort in Congress.A special congressional “super committee” is looking for at least $1.2 trillion in deficit savings over 10 years before a November 23 deadline. Analysts say any deal could include $300 billion to $500 billion in reductions from Medicare, Medicaid and other federal health programs.
Three years after the onset of the financial crisis, the
survey found that 80 percent of investors believe volatility
continues to affect the investment landscape while 66 percent
have changed expectations about future returns.Despite recognizing the need for diversification as a
factor in managing risk, many investors still appear to be in
the dark regarding their own portfolios. Only 49 percent said
they understood their portfolio’s risk “moderately” or “very
well.”“At the end of the day, investors know they need to invest,
but they are searching for ways to protect their principal.
They need better tools to manage risk and lessen volatility,”
said John Hailer, president and chief executive officer for
Natixis Global Asset Management.Hailer said portfolio construction now demands a broader
set of tools to better manage risk — moving past traditional
cash, bonds and long-only investing to strategies that also
employ active management and products such as alternative
investments that could limit volatility or provide returns
uncorrelated to the markets.Investors, however, appear reluctant to change their
strategy. The survey found that 63 percent of investors say
they will invest only in products with which they are familiar,
and 69 percent say they need to learn more about alternatives
before investing in them.
