Municipal Fund Securities: Products, Structure, and Markets
What municipal fund securities are
Municipal fund securities are municipal securities issued by a state, local government, or instrumentality whose proceeds are pooled or invested in a fund. The main types tested are 529 college savings plans, ABLE disability savings programs, and local government investment pools (LGIPs). They are exempt municipal securities, not registered mutual funds, even though the underlying investments often are mutual funds or ETFs.
529 plan structures
There are two 529 structures: savings plans, where contributions are invested in underlying funds and account value varies; and prepaid tuition plans, where the purchaser buys tuition credits or units at current prices. Prepaid plans are often state-guaranteed, but not always. ABLE accounts resemble 529 savings plans but cover disability expenses and have contribution limits tied to the annual gift tax exclusion. LGIPs are short-term, high-quality pools for governmental cash management.
Distribution and fees
Programs are sponsored by a state authority, managed by a program manager, and sold either directly or through broker-dealers. Fees may include enrollment, annual account maintenance, asset-based program management, and underlying fund expenses. Sales charges may apply in advisor-sold share classes.
Trap: questions imply 529 interests are mutual fund shares or SEC-registered securities. They are municipal fund securities. Another trap: treating prepaid plans as market-valued savings plans. Rule of thumb: if the investor bears investment risk, it is a savings plan; if the program bears tuition inflation risk, it is prepaid.
Worked example: A client wants a plan with no investment risk. A prepaid plan may fit only if the state guarantee is real; a savings plan with a stable-value option is not a guarantee.