We’ve become so obsessed with mandates, exchanges andmedical-loss ratios that we’re starting to lose sight of the forestfor the trees. And we’re certainly not paying attention to all theother predators lurking behind every shadow. Now I realize those ofus in the media are as complicit as anyone in this suffocatingcoverage. (If it bleeds, it leads, right?) In any given month,health reform in some shape or form gobbles up as many pages as anyother single topic in this magazine.

So, at the risk of casting a cloying pall over your alreadytumultuous workday, it’s worth taking time out from wringing ourhands over what’s going on in Washington to take a wider view ofthe landscape as it stands today. (And don’t think for a second wedon’t share your concern, because despite our roles as journalists, observing and documenting what’s going on in thebenefits business, without readers we’re no better than Nerofumbling with this fiddle while the rest of you burn.

Like the proverbial tree crashing into the deserted forestfloor, without an audience, our words don’t make a sound. Unreadwords might as well be blank pages.) You think there isn’t a hordeof other sources of friction or erosion shaping the landscape underour collective feet? You think the suits in Washington are the onlyones trying to put you out of business? There are at least 50 othersets of regulators working every day to make your job harder.

And as if your commissions and client base hasn’t taken enoughof a hit, do you really think carriers are eager to keep forkingover a chunk of their profits to you? Oh, and in case you haven’tnoticed, employers and employees alike have changed. These aren’tyou father’s clients. We’re dealing with a consumer base far moretechnologically advanced, and yet still as uneducated as ever.

If anything, they’re more dangerous than ever, at least withregard to their unrealistic expectations and unsustainablelifestyles. So let’s look past the elephant in the room and spendthe next few months looking at what else we should be worriedabout. This month we take a look at a couple of what might becalled sacred cows in the employee benefits and retirementspace.

Our first report takes a look at what was once considered arock-solid investment for employees: state 529 plans, which allowedworkers to set aside tax-free money for their children’s collegeeducations. But something happened on the way to that Americandream. The economy tanked, and revenues every governor expected –both red and blue – dried up faster than a politician’spromises.

State budgets across the country collapsed right along with thehousing market, and now, for the first time in our history, weactually have a few seriously considering bankruptcy – if that’seven legal. What was once a sure thing now looks a lot liketrusting the hungry fox to look after the hen house.

Meanwhile, while everyone decries health care spending outpacinginflation, everyone seems to forget that college tuitions costsleave them both in the dust. Now we have more than a few policy(and economic) experts whispering about the higher educationbubble, which appears to be following a frighteningly familiarpattern. What does this mean for states, employees and brokerswho’ve committed to thiLike most investment vehicles, 529 collegesavings plans have had their share of bumps during therecession.

Prepaid 529 plans, in which states promise and sometimesoutright guarantee set tuition fees, have taken a double-whammyduring the recession — a hit to investment returns due to the 2008stock market dive, and higher-than-expected spikes in collegetuition costs due to overly-strained state budgets. Traditional 529plans, in which families invest money tax-free if they use theearnings strictly for educational purposes, also lost significantvalue when the market sank. Families whose plans were heavilyweighted in equities are just now rebounding.

But for those with close-to-college-aged kids who did notreallocate into more conservative instruments before the crisishit, it’s been too late to recover. Experts say most 529 plans willrebound even further as the market improves, including most prepaidplans that lock in future tuition prices at a percentage of today’sprices — particularly if state administrators readjust newcontracts upward to account for the now higher-than-projectedtuition costs.

However some states, like Texas, that provide guaranteed lowertuition fees in at least one of their plans will have to figure outhow to pay for that commitment once their plan funds run out. Otherstates, such as Illinois, that do not provide guarantees might facea public relations nightmare if their commitments fall short. TheCollege Illinois! prepaid 529 plan lost so much money in 2010 that31 percent of the plan was underfunded at the end of its fiscalyear, triggering a state audit of its investment practices.

“States’ budgets are currently in flux and as the economycontinues to improve, we’ll start to see states fortify theirprepaid plans,” says Paul Curley, senior research analyst atFinancial Research Corp. “But a lot of them are also having to haveconversations for the long-term planning of their prepaid plans.”Traditional 529 plans are rebounding better than expected, Curleysays. Collectively, the plans’ assets rose 56 percent from December2008 to December 2010, both from appreciation and newcustomers.

During that time, there was a 75 percent increase in net salesand a 13 percent increase in new accounts opened. For these typesof plans, most families whose kids are still quite young couldlikely see the values of their portfolios rise to or nearpre-crisis levels. Curley expects more families to make sure toreallocate into more conservative instruments as their kids reachteen years, to prevent disasters others faced when their portfoliossank.

“I think the lesson learned from 2008 is the value ofprofessional advice, and now investors are focusing on more thanjust fees in the 529 selection process,” Curley says. “People whofocused on fees went to the direct channel, but the value of anadvisor will always be there in terms of educating investors on theproper allocation changes over time and insuring that properinvestment procedures are followed.” The state of Illinois isfacing particularly tough challenges for its prepaid 529 plan,College Illinois!

Last month, the Illinois House voted unanimously to directAuditor General William Holland to study the investment decisionsof the Illinois Student Assistance Commission, which oversees theplan. The vote was based on an earlier report by Holland thatquestioned whether ISAC had engaged in “sound business practices”for investing $12.8 million in ShoreBank before the Chicagoinstitution failed last year and hiring a West Coast consultingfirm that recommended the investment. The $1.25 billion CollegeIllinois! program faced a $338 million deficit as of last summer,leaving the program 31 percent underfunded.

In 2007, College Illinois! was underfunded by 7 percent. Thestate is also scrutinizing the ISAC’s proposal to invest nearly 50percent of its holdings into alternative investments such asderivatives, real estate and hedge funds. State Rep. Jim Durkin,one of several Illinois lawmakers who led the call for the audit,says that while the state does not guarantee the contract is in theplan, there’s a “moral obligation for the state of Illinois to notsit on its butt and do nothing about it.”

“I don’t want to speculate on the future of what the state willdo — the worst thing you can say these days is the word, ‘bailout,”Durkin says. “I want this program to survive on its own. Let it getback on its own two feet and honor those obligations to parents andgrandparents.” The ISAC did not return phone calls for comment.William McLaurine, a chartered fund specialist at Financial AdvisorFinancial Network in Chesterfield, Mo., said that only a handful ofhis clients are enrolled in the College Illinois! program.

“If you look at what’s going on with state budgets, that causesme some reservation in some prepaid plans,” McLaurine says. “Thestate of Illinois has well-documented financial problems. They saidclients don’t need to worry, but you’ve got to wonder in the backof your mind.” In choosing 529 plans for his clients, McLaurinesays he first determines whether the plans’ money managers are fromreputable firms. “I personally have plans that are more stable, inthat the investment manager has been working for an extended periodof time,” he says.

“If I know a plan is up for contract, I might want to see how itgoes first.” In Texas, the state in 2003 closed its guaranteedprepaid 529 plan to new enrollees, because state college tuitioncosts were skyrocketing after the legislature stopped setting thefees. In the 2002-2003 school year period, tuition prices onaverage rose 12.8 percent; 12.5 percent for 2003-2004; and 17.8percent for 2004-2005. To incentivize state college boards to curbtuition increases, the legislature in 2007 created a new fund,Texas Tuition Promise Fund, which omits the state guarantee, butmandates for the state’s colleges to honor the locked-in prices inthe participants’ contracts.

The plan pays the lesser of net earnings on the money a familyhas put into the plan, or up to 101 percent of the current tuitionand fees. “This pushes the risk onto the universities, so they canhave an incentive to keep their tuition down,” says Kevin Deiters,director of the Educational Opportunities and Investment departmentof the Texas Comptroller. “The Promise Fund should continue toremain healthy.” After the Promise Plan was created, state collegetuition increases were more modest: In the 2008-2009 year, fees onaverage rose 6.3 percent; in 2009-2010, 6.03 percent; and in2010–2011, 4.96 percent.

Shirley White-Stevens, a certified financial planner at theCollege Funding Services Center in Allen, Texas, says she typicallydoes not advise clients to enroll in that new plan because of herwariness of the mandate for the state’s colleges to uphold thecontracts. “If the investment return doesn’t keep up with prices,and a kid decides to go to private school, the parents are going toget an extremely low return – they might just get what they paidinto it,” White-Stevens says.

Still, there are some of her clients who prefer the PromiseFund. “They feel safe putting their money into it — even if theydon’t make that much of a return — because that’s their comfortpoint and they don’t want to risk anything,” she says. As for the95,000 accounts still active in Texas’ guaranteed plan, all willhave their contracts honored under the “constitutionally-protected”trust fund — even when the fund is projected to be depleted by2018, Deiters says. “When the plan runs out of money, under statutethe comptroller takes the first money available” to honor theparticipants’ contracts, he says.

“At that point, the legislature would need to appropriate moneyeach year to keep it going.” Neither Deiters nor Comptrollerspokesman Allen Spelce would speculate on how Texas lawmakers in2018 would pay for the projected shortfall. Texas is among the manystates with significant budget issues, but since 60 percent of thestate’s revenues come from sales tax, Spelce says that revenuesshould rise “dramatically” once the economy improves. Lawmakerscould also decide to use part of the state’s $9.4 billion “rainyday” fund to cover the projected shortfall.

But, “that is a decision to be made by the legislature,” Spelcesays. For Virginia’s Prepaid Education Program (VPEP), strongmarket performance in 2010 was offset by higher than expectedtuition increases and increases in the future tuition growthassumptions. As a result, net assets in the state’s “enterprisefund” increased by $76.6 million to an “actuarially determined”deficit of $207.4 million from a deficit of $284.0 million in theprior year (all VPEP activities and the plan’s operating activitiesare accounted the state’s enterprise fund.)

But Mary Morris, chief executive officer of the Virginia CollegeSavings Plan, says that “actuarially determined” statements arejust a “snapshot,” and are very different from statements of cashflow. “And there are absolutely no issues with cash flow in thisprogram.” As such, the plan should continue to have no problemmeeting its contractual obligations to participants, Morrissays.

The state has a “statutory guarantee” to uphold the obligationsin the event the plan falls short, but Morris says that it would behighly unlikely the prepaid plan would ever need such a fix. Theplan has assumed a long-term rate of return of 7 percent on theVPEP investments.

As of June 30, the total return since inception was just under 6percent net of fees and reflected the prior year’s rebound inequity and fixed income markets. As of Sept. 30, the return on theVPEP investments since inception had risen to 6.35 percent. Morrissaid the return assumption would be reviewed at the end of itsfiscal year in June, depending on how the investments areperforming, and pricing for future contracts will be set.

The two principle pricing drivers are the return assumption andanticipated future tuition increases, Morris says. “Our goal is tobe realistic and conservative in our outlook,” she says. “We wantto make sure we can keep the lowest price possible, while stillmeeting our long-term obligations.” Karen Busanovich, a certifiedfinancial planner in Woburn, Mass., says that Massachusetts has aprepaid 529 plan that is guaranteed by the state, but most of herclients opt for plans offered by other states.

“Most of my clients who are really interested in 529 plans aregenerally buying them for younger children, and they are reallyconcerned that they don’t know if their kids will want to stay inMassachusetts or go somewhere else,” Busanovich says. “InMassachusetts, we don’t have any tax incentives for investing inthe state plan, and that gives me the leeway to look at all theplans to see which ones best meet their needs.”

One plan that Busanovich recommends is the Private College 529Plan, a prepaid plan whose contracts are guaranteed by the 270participating private colleges and universities, includingPrinceton, Stanford, MIT and the University of Chicago. The plan isoperated by the nonprofit Tuition Plan Consortium LLC in St. Louis,and is administered and serviced by OppenheimerFunds. According toNancy Farmer, the consortium’s president, since the participatingschools bear the investment risk, they also count on positivereturns in good years to help them subsidize the locked-in tuitionprices to planholders.

“Some years there will be excesses and some years there will beshortfalls,” Farmer says. “But the participating schools are inthis for the longhaul, and the expectation is that they will breakoven over time.” The plan has roughly $200 million assets undermanagement and 8,000 accounts, but Farmer expects the program togrow in popularity. “We are the only prepaid 529 plan that isn’tsponsored by a state, so our consumers don’t have to worry aboutstate budget problems affecting our plan.

The guarantees are made by the schools,” she says. While bothtraditional and prepaid 529 plans have had their share ofchallenges over the past several years, the advisors say they arestill the best option for many families. Participants can investreasonable amounts in either lump sums or through automatic monthlybank drafts, and in some states, they can get a tax deduction fortheir investment.

“Certainly there has been investment risk — there have been twomajor downturns in the last 10 years, but a lot of folks have beenfortunate enough to ride through those downturns and are now seeingsome positive returns,” Mclaurine says. “Those returns arecertainly not what any one of us expected, but there’s no freeride. You have flexibility in the savings plans to some extent, butyou’re still exposed to the market.

“Going forward, I’m not a guy to say the markets are going toboom, but there’s got to be some type of return because we’ve comeoff such significant lows,” he says. s niche of the business?Speaking of the American way, if you think a college degree istough – if it’s even worth it anymore – retirement is almost thestuff of pipe dreams.

And those anemic state budgets look like Precious next to theanorexic supermodel most Americans’ 401(k) plans have become. Ofcourse, the politicians are in full “Blame the messenger” mode.Don’t look now, but while we’re all wringing our hands over healthreform, 401(k) reform is sneaking up behind you to take anotherbite out of your business.

This month’s second feature takes a closer look at what the newrules are, what’s expected of you and what you need to do tosurvive. Good luck, and we’ll be back next month to talk about thefuture – and what this business will look a decade from now.