Market Analysis – 64102001 – Education savings account

Executive Summary

The U.S. Education Savings Account market, dominated by Section 529 plans, has reached a total asset value of $480.7 billion as of Q4 2023. The market has demonstrated robust growth, with a 3-year asset CAGR of est. 8.5%, driven by rising education costs and favorable tax legislation. The single most significant recent development is the SECURE 2.0 Act, which creates a major opportunity by allowing tax-free rollovers of unused 529 funds to Roth IRAs, mitigating a key deterrent to adoption. This legislative enhancement, coupled with persistent fee compression, presents a favorable environment for corporate sponsors to enhance employee benefit offerings.

Market Size & Growth

The market for Education Savings Accounts, primarily represented by U.S. 529 plans, is substantial and continues to expand. The global Total Addressable Market (TAM) is effectively the U.S. market, which holds the vast majority of assets in this specific commodity class. The projected 5-year CAGR is estimated at 6-8%, contingent on equity market performance and continued legislative support. The three largest geographic markets are state-specific, ranked by total assets under management (AUM).

Top 3 Geographic Markets (by AUM) 1. Virginia 2. California 3. New York

Source: AUM figures from [College Savings Plans Network, December 2023]

Key Drivers & Constraints

1. Demand Driver: The escalating cost of higher education remains the primary catalyst for market growth. The average tuition and fees at private, non-profit four-year institutions have increased by ~25% over the last decade, compelling families to seek tax-advantaged savings vehicles.
2. Regulatory Driver: Favorable tax treatment is critical. Contributions grow federally tax-deferred, and withdrawals for qualified education expenses are tax-free. The SECURE 2.0 Act of 2022 further enhances this by allowing rollovers to Roth IRAs, reducing the risk of over-funding.
3. Cost Constraint: Underlying investment fund expense ratios and administrative fees are a key focus for consumers and plan sponsors. Intense competition has led to significant fee compression, benefiting end-users but pressuring manager margins.
4. Market Constraint: As assets are invested in mutual funds and ETFs, account values are subject to equity and bond market volatility. A significant market downturn, like the one in 2022, can lead to temporary asset depreciation and slower adoption rates.
5. Competitive Constraint: 529 plans compete with other savings vehicles, including Roth IRAs (which allow penalty-free withdrawals for education), Coverdell ESAs, and UTMA/UGMA custodial accounts, each with different contribution limits and tax implications.

Competitive Landscape

Barriers to entry are High, driven by stringent regulatory oversight (SEC, MSRB), significant capital requirements, and the need to secure state government sponsorship contracts.

⮕ Tier 1 Leaders * Capital Group (American Funds): Manages Virginia's Invest529, the nation's largest plan; known for actively managed funds and strong advisor-sold distribution. * Fidelity Investments: A dominant player managing plans for multiple states (MA, NH, DE); differentiated by a robust direct-to-consumer platform and a wide range of investment options. * The Vanguard Group: Manages New York's 529 Direct Plan and others; recognized as the leader in low-cost, passive index fund strategies. * T. Rowe Price: Manages plans for states like Maryland and Alaska; known for its target-date "enrollment-based" portfolios and active management expertise.

⮕ Emerging/Niche Players * Union Bank & Trust: Manager of Virginia's Invest529, a key partner for Capital Group. * Ascensus: A leading administrator providing the back-end technology and recordkeeping for numerous state plans, including New York and California. * Fintech Platforms (e.g., Gift of College, Backer): Focus on simplifying contributions, gifting, and enrollment, often integrating with employer benefit platforms. Backer was acquired by Goldman Sachs.

Pricing Mechanics

The "price" of a 529 plan is not a single figure but a composite of fees that create a drag on investment returns. The primary cost is the Total Annual Asset-Based Fee, which is the sum of the underlying investment expense ratios, a state administration fee, and (if applicable) a program management fee. For corporate clients, there may be an additional platform or recordkeeping fee to integrate the benefit, though this is often waived for large employers.

Direct-sold plans typically have lower all-in costs (0.10% - 0.60%) compared to advisor-sold plans (0.50% - 1.50%), which include sales commissions or 12b-1 fees. Fee compression is the dominant trend, with providers aggressively cutting expense ratios to gain market share. The most volatile cost elements are not the fees themselves, which are relatively stable, but the impact of market performance on the total asset value from which fees are calculated.

Most Volatile Cost Elements (Fee Components) 1. Underlying Fund Expense Ratios: Down ~10-15% over the last 3 years due to intense competition. 2. State Administration/Program Mgmt. Fees: Generally stable, but some states have reduced them. Recent change: est. -5% in competitive plans. 3. Sales Loads (Advisor-Sold): Trending toward zero as more assets shift to fee-based advisory models.

Recent Trends & Innovation

• SECURE 2.0 Act Implementation (Effective Jan 2024): The most impactful recent change. Allows beneficiaries to roll over up to $35,000 (lifetime limit) from a 529 account held for at least 15 years to a Roth IRA, tax- and penalty-free. This directly addresses consumer fears of over-saving.
• Continued Fee Compression (2022-2023): Major providers, including Vanguard and Fidelity, have continued to lower expense ratios on underlying funds and reduce or eliminate administrative fees to attract assets. The average asset-based fee for direct-sold plans has fallen below 0.35%. [Morningstar, October 2023]
• Expanded Qualified Expenses (2019-2022): Legislative changes have broadened the definition of qualified expenses to include payments on qualified student loans (up to a $10,000 lifetime limit) and tuition for K-12 private schools (up to $10,000 per year).

Supplier Landscape

Regional Focus: North Carolina

North Carolina's demand outlook for education savings is strong, driven by a robust in-migration trend, a growing corporate presence in the Research Triangle Park (RTP) and Charlotte, and a world-class public university system. The state's official plan, the NC 529 Plan, is administered by the College Foundation of North Carolina (CFNC) and managed by Ascensus. A critical local nuance is that North Carolina is one of the few states that does not offer a state income tax deduction or credit for contributions to its 529 plan. This removes a key incentive and means NC residents can choose any state's 529 plan without a local tax penalty, increasing competition for the in-state plan.

Risk Outlook

Actionable Sourcing Recommendations

1. Leverage our employee base to negotiate a zero-cost administrative platform. Consolidate with a single national provider (e.g., Fidelity, Vanguard) to secure a waiver of all corporate platform fees and gain access to institutional-class funds with expense ratios below 0.10%. This positions the benefit as a high-value, low-cost offering for employees and eliminates direct cost to the company.

2. Prioritize a supplier partnership focused on maximizing the new SECURE 2.0 Act rollover benefit. Select a provider with superior communication and financial wellness tools to educate employees on this feature. This mitigates the primary fear of over-funding and can be leveraged to target a 15% increase in employee enrollment within 12 months, boosting the value of our total rewards package.