Supporting the 529 Plan Market
Steve Cutka
Section 529 college savings plans were created by the U.S. government in 1996. Through tax benefits, they are designed to encourage saving for higher-level education at an early stage. While account openings have been down in recent months, in 2007 alone, assets reached almost $112 billion, a 23.4% increase from the $90.7 billion recorded in 2006.
The need for processing efficiencies
In 2001, when 529 Plans were just beginning to gain traction, assets at mid-year were at a mere $11 billion. But, with that figure representing a 40 percent spike over the previous 12 months, it was enough for NSCC, along with a task force of the Investment Company Institute (ICI), to begin an industry discussion on ways to support the funds and firms engaged in offering these fast-growing plans. The solution, it became clear, was for NSCC to leverage its existing services to create automated solutions that would alleviate a potential processing dilemma if left in a manual, inefficient environment.
By November 2001, NSCC had made important modifications to Fund/SERV®, the industry standard for fund transactions, adding new codes to clearly identify 529 Plan types of transactions, as well as the qualifying beneficial owners. Later developments made it easier for firms to open accounts by adding fields for required information, such as customer and beneficiary citizenship, city and state domicile, gender and type of account. “These enhancements facilitated the shift to eliminate paperwork and the tedious tradition of sending applications and checks by mail, and it gave the industry a cost-efficient method to streamline their processing. They improved communication and facilitated reconciliation among firms, funds and their transfer agents,” explained Rita Gribben, a product manager in DTCC’s Wealth Management Services business.
Far from an easy sell
These education plans are unique investments in many ways. They are sponsored by a state, a state agency or educational institution. Firms need to provide detailed information to the issuer. And one state’s requirements can be very different from the next. These are just a few factors that make the plans difficult to sell through broker/dealers and other third-party distributors.
Further automation
Steve Cutka, vice president, Operations Relations Management for American Funds, is a member of the ICI Task Force for Fund-Sponsored IRAs and 529 Plans. He has spent considerable time analyzing the current environment and believes that Fund/SERV and Networking (an automated, centralized record-keeping system, offered by NSCC, through which all customer account activities can be exchanged and reconciled) will further help streamline 529 Plan processing.
Changes to Fund/SERV will include new asset-type indicators to the Order, Correction Order and As-Of Order records. In addition, NSCC will increase the number of social codes to three services – Fund/SERV, Networking and Commission Settlement – that affect trading, account setups, confirmations and commission payments. These changes will provide greater transparency of account information passed via NSCC.
Specific enhancements to Networking will involve adding new transaction description codes enabling a fund company to assign transaction categories that are true representations of what the actual transaction is. “The addition of these codes will provide firms with more accurate detail of their clients’ transaction history that occurred at the fund. With the increased use of Networking for Direct Accounts [those held directly at a fund company], these additional descriptions will allow firms to better track and post fund-generated activity,” Cutka said. System enhancements will be rolled out during 2008 and 2009.
Kathy Joaquin, director of Operations and Distribution, ICI, added: "The need for operational efficiencies for 529 Plan processing has increased as assets have grown. The enhancements that NSCC is planning, in addition to workflow changes for the industry, will result in more transactions through their systems, which will lower the cost of 529 Plan processing considerably for both funds and firms.”
The larger picture
In the current environment, a fund company administering a 529 Plan is required to maintain the investor’s application. However, if that were to change and a broker/dealer or other intermediary firm were to retain the 529 Plan applications at their end, Networking’s Level 3 membership could be used to streamline account reconciliation and provide transparency of information between a fund and a firm. Level 3 is one of five different reporting levels available to users of Networking. It allows firms to maintain full client control, handling orders, customer statements and tax reporting.
“Ideally, we would like broker/dealers to be able to create a standard application which would capture all the information necessary to open an account and then incorporate it into a broker/dealer’s processing environment. Now, they have to manage different types of applications, retain them, and know when to use them,” Cutka said.
Going forward
Gribben said that NSCC will continue to identify opportunities to ease the processing burdens for funds and firms, such as creating digital-image functionality to transmit PDFs of required documents versus hard copy, which is now the norm. 