Deflated investors now seeking inflation hedges in 529 plans

Even though stock prices have gone up in recent months, the nation’s Section 529 college savings programs continue to add conservative investments to their portfolios — including a hike in the number of inflation-hedging tools.
Some states are demanding that program managers include more conservative investment options — Treasury inflation-protected securities, money market funds, FDIC-insured products and the like — to lure skittish investors into the college savings vehicles.
“Today the average investor is still a little reluctant to put everything wholeheartedly into equities,” said Andrea Feirstein, managing director of AKF Consulting Group, which produced a report analyzing trends in the nation’s 529 plans. “The states are saying we have to offer some alternatives to get them back in.”
Meanwhile, the Dow Jones Industrial Average has risen by about 9% over the past five months. That rally has been perpetuated by economic reports that continually have beat estimates.
Since AKF issued its last report in September 2010, eight states have added TIPS into 11 plans to hedge against future inflation, according to the new AKF study of the nation’s 94 savings plans. The states are: Alabama, Arizona, Connecticut, Missouri, Nebraska, Oregon, Rhode Island and Texas.
Adding inflation hedges to 529 plan portfolios is a trend Ms. Feirstein and other college savings experts expect will continue.
Steve Dombrower, director of college savings investments for OppenheimerFunds Inc., said he’s worked with a few plans that have asked for different asset classes with the potential to increase risk-adjusted returns if inflation shows up.
“Inflation will eventually rear its ugly head,” he said. “Everyone is looking for ways to improve their investment lineups and give clients a smoother ride as we move forward.”

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Some states are choosing TIPS, while others are guarding against inflation by adding gold, other commodities or real estate — in other words, investments that are either not correlated or less correlated to equities, Mr. Dombrower said.
The nation’s 529 plans also increasingly are turning to money market options; 13 plans from eight states have added these investments since September 2010, according to the AKF report, which covers changes through February 2012. Those states are: Alabama, Connecticut, Illinois, Nebraska, Nevada, Oregon, South Carolina and South Dakota.
More than half of the program managers of those plans subsidize the cost of these investments to ensure at least a 0% rate of return in today’s low-interest-rate environment, the report said. The number of states offering federally insured products also jumped to 17, compared with eight in September 2010.
States are increasingly offering multimanager investment options within their plans, as well — a trend that is especially popular with the direct-sold plans, Ms. Feirstein said. Direct-sold plans also are more likely to offer index options, while adviser-sold plans typically offer more individual mutual funds, she said.
Investor fees within 529 plans continue to decrease, with the average direct-sold fee coming down somewhere between 0.58% and 0.64%. That’s about a 10% reduction for investors since the last AKF report in September 2010. Plans that haven’t substantially cut fees are likely to see continued pressure to reduce them, Ms. Feirstein said.
In fact, Nebraska last week announced that it had trimmed its portfolio expenses of the Nebraska Education Savings Trust, the state’s 529 college savings plan, by up to 52%, net of asset-based fees. That will result in an average 0.03% reduction for the NEST Direct and NEST Advisor plans, according to the Nebraska State Treasurer’s Office.
The number of plans available to investors also is up.
Since AKF last reviewed the college savings programs in September 2010, there has been a 5.6% increase in the number of plans, with a bump in the number of adviser-sold plans to 59, from 53, and direct plans to 34, from 30.
The most recent market figures suggest that new contributions overall are up, with $2.3 billion coming into plans in the last three months of 2011, compared with $2.1 billion in the last quarter of 2010, according to Financial Research Corp. The average account size has dropped, however — from $5,993 at the end of 2010 to $4,920 by the end of last year.