At least two more states, Indiana and Iowa, are considering developing 529 plans that allow account holders saving for their children's educations to include FDIC-insured products. The states are aiming to extend the plans to bank customers who don't currently have investment accounts, an approach that could open the door for advisors looking for investment clients down the pike, although it wouldn't benefit production now.

Eight states already offer FDIC-insured savings accounts and/or certificates of deposit (CDs) in the 529 accounts they provide directly to residents. Reps can also recommend these accounts to customers, according to Mike Sherzan, CEO of Broker Dealer Financial Services Corp., which stations reps in 90 banks and 100 credit unions, and runs a platform to distribute brokered CDs. But that's been rare, he says, because "nobody is paying advisors any commissions."

Nevertheless, says Sherzan, there is good reason for bank reps to recommend FDIC-insured products. In today's volatile market, where a flash crash could decimate a 529 plan

holding mutual funds, CDs' guaranteed return of principal is attractive, especially when the educational funding will be needed in a few years.

Moreover, both Indiana and Iowa aim to make 529 plans holding FDIC-insured products available for sale in banks across their state, giving reps in those banks another arrow in their quiver of products to offer. "What we want is a product that is available locally here in Iowa for people to be able to purchase at any Iowa bank," says Karen Austin, deputy treasurer at the Iowa Department of Revenue.

Austin says it's still too early to discuss how the plan would sell CDs from local banks — existing plans hold FDIC-insured products from one or two banks, to simplify administration — or whether personnel would be compensated for selling them. However, if banks could sell their own CDs into the plans, it would help them build deposits and their financial advisors could play a part.

Andrea Feirstein, managing director of AKF Consulting, which is advising Iowa on establishing a 529 plan containing the FDIC-insured products, notes this could help mitigate banks' longtime concern about reps cannibalizing their deposits by drawing customers into securities. She adds, "If Iowa can do something that injects more capital into Iowa banks, that's another positive."

Plus, customers may commend their advisors for steering them into such safe products. "This is very much driven by customer demand," says Richard Mourdoch, the state treasurer of Indiana. "We've gotten a lot of customer calls and requests to have such an option available, especially from people planning to pull money out of the plans in a few years." He adds that a primary goal is to encourage investment in the plans by middle- and lower-income families, who may not have securities accounts.

Indiana's plan, however, looks like it will offer CDs from the College Savings Bank, instead of the local bank. An Indiana Treasury spokesman says the College Savings Bank would in turn pay commissions on the deposits it receives, and that both bankers — without securities licenses — and financial advisors could sell the CDs.

Mourdoch says he hopes to have the FDIC-insured option available by year-end, while he anticipates deciding how to proceed by then.

In other 529 news, an amendment initiated by Rep. Emanuel Cleaver (D-Mo.) that sought to allow FDIC-insured products to be offered in 529 plans by eliminating the requirement that they be registered as securities was nixed in June from the massive financial reform legislation. The bill's benefits, however, were questionable.

"In D.C., the most commonly applied law is the law of intended consequences," Mourdoch says. He notes since eight states already offer the insured products in 529 plans, federal rules could have complicated the administration of such plans at the state level and likely reduced the transparency of such accounts.

However, two bills affecting 529 plans were recently introduced on Capitol Hill. One to temporarily allow 529 plan distributions to be used to repay student loans for the plan's designated beneficiary, and the other providing a tax credit to enable lower-income families to save through such plans.