Just one weekend after President Bush unveiled his plan to overhaul the nation's savings structure, it is apparent that one big loser may be the 529 college savings account. The fallout could be a setback for the roughly three score providers that have rushed to build costly 529 programs hoping to reap the growth projected by consultants like Cerulli Associates and Financial Research Corp.

These types of new laws, though, were not a part of those projections.

The Bush administration is proposing the creation of Life Time Savings Accounts (LSAs) that some believe would displace the 529 plan. Although LSAs would allow investors to save on $7,500 per year (against many times that amount in a 529), they would provide more flexibility for investors in how they spend the money.

Both types of plans would allow investors to put after-tax money into the accounts and make tax-free withdrawals. Under the proposal, funds can be taken from an LSA for any reason while funds pulled from a 529 must be spent on higher education. Also, unlike IRA accounts (which would become RSA accounts under the plan), anyone would be able contribute up to $7,500 in the LSA, no matter what their earned income. That means that parents would be able to open accounts in their children's names.

By using a trust structure around the LSA, parents would also be able to control how their children access the funds.

There is still a slight tax advantage to 529 plans in states that allow 529 account contributions to be deducted from state and local taxes. Indeed, one way for states to fight back against the proposed rules would be to add that deductibility if they do not already offer it.

Already, sales of 529 accounts have been slower than some hoped. "They are really a door-opener for financial planners to raise larger issues," says one industry consultant." If the Bush proposal becomes law, they may not even be that.

The biggest losers would be firms such as TIAA-CREF, which administers 17 state programs and lacks retail distribution and State Street (SSgA). SSgA made a bet to become the 529 industry back-end with its Schoolhouse Capital division. Other major providers such as Merrill Lynch and American Funds have diversified enough distribution channels to benefit as much from the creation of LSAs as they lose from 529 plans.  

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