If anything, they’re more dangerous than ever, at least with regard to their unrealistic expectations and unsustainable lifestyles. So let’s look past the elephant in the room and spend the next few months looking at what else we should be worried about. This month we take a look at a couple of what might be called sacred cows in the employee benefits and retirement space.

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

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

Meanwhile, while everyone decries health care spending outpacing inflation, everyone seems to forget that college tuitions costs leave them both in the dust. Now we have more than a few policy (and economic) experts whispering about the higher education bubble, which appears to be following a frighteningly familiar pattern. What does this mean for states, employees and brokers who’ve committed to thiLike most investment vehicles, 529 college savings plans have had their share of bumps during the recession.

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

But for those with close-to-college-aged kids who did not reallocate into more conservative instruments before the crisis hit, it’s been too late to recover. Experts say most 529 plans will rebound even further as the market improves, including most prepaid plans that lock in future tuition prices at a percentage of today’s prices — particularly if state administrators readjust new contracts upward to account for the now higher-than-projected tuition costs.

However some states, like Texas, that provide guaranteed lower tuition fees in at least one of their plans will have to figure out how to pay for that commitment once their plan funds run out. Other states, such as Illinois, that do not provide guarantees might face a public relations nightmare if their commitments fall short. The College Illinois! prepaid 529 plan lost so much money in 2010 that 31 percent of the plan was underfunded at the end of its fiscal year, triggering a state audit of its investment practices.

“States’ budgets are currently in flux and as the economy continues to improve, we’ll start to see states fortify their prepaid plans,” says Paul Curley, senior research analyst at Financial Research Corp. “But a lot of them are also having to have conversations for the long-term planning of their prepaid plans.” Traditional 529 plans are rebounding better than expected, Curley says. Collectively, the plans’ assets rose 56 percent from December 2008 to December 2010, both from appreciation and new customers.

During that time, there was a 75 percent increase in net sales and a 13 percent increase in new accounts opened. For these types of plans, most families whose kids are still quite young could likely see the values of their portfolios rise to or near pre-crisis levels. Curley expects more families to make sure to reallocate into more conservative instruments as their kids reach teen years, to prevent disasters others faced when their portfolios sank.

“I think the lesson learned from 2008 is the value of professional advice, and now investors are focusing on more than just fees in the 529 selection process,” Curley says. “People who focused on fees went to the direct channel, but the value of an advisor will always be there in terms of educating investors on the proper allocation changes over time and insuring that proper investment procedures are followed.” The state of Illinois is facing particularly tough challenges for its prepaid 529 plan, College Illinois!

Last month, the Illinois House voted unanimously to direct Auditor General William Holland to study the investment decisions of the Illinois Student Assistance Commission, which oversees the plan. The vote was based on an earlier report by Holland that questioned whether ISAC had engaged in “sound business practices” for investing $12.8 million in ShoreBank before the Chicago institution failed last year and hiring a West Coast consulting firm that recommended the investment. The $1.25 billion College Illinois! 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. The state is also scrutinizing the ISAC’s proposal to invest nearly 50 percent of its holdings into alternative investments such as derivatives, 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 the plan, there’s a “moral obligation for the state of Illinois to not sit on its butt and do nothing about it.”

“I don’t want to speculate on the future of what the state will do — 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 get back on its own two feet and honor those obligations to parents and grandparents.” The ISAC did not return phone calls for comment. William McLaurine, a chartered fund specialist at Financial Advisor Financial Network in Chesterfield, Mo., said that only a handful of his clients are enrolled in the College Illinois! program.

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

“If I know a plan is up for contract, I might want to see how it goes first.” In Texas, the state in 2003 closed its guaranteed prepaid 529 plan to new enrollees, because state college tuition costs were skyrocketing after the legislature stopped setting the fees. In the 2002-2003 school year period, tuition prices on average rose 12.8 percent; 12.5 percent for 2003-2004; and 17.8 percent for 2004-2005. To incentivize state college boards to curb tuition increases, the legislature in 2007 created a new fund, Texas Tuition Promise Fund, which omits the state guarantee, but mandates for the state’s colleges to honor the locked-in prices in the participants’ contracts.

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

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

Still, there are some of her clients who prefer the Promise Fund. “They feel safe putting their money into it — even if they don’t make that much of a return — because that’s their comfort point and they don’t want to risk anything,” she says. As for the 95,000 accounts still active in Texas’ guaranteed plan, all will have their contracts honored under the “constitutionally-protected” trust fund — even when the fund is projected to be depleted by 2018, Deiters says. “When the plan runs out of money, under statute the comptroller takes the first money available” to honor the participants’ contracts, he says.

“At that point, the legislature would need to appropriate money each year to keep it going.” Neither Deiters nor Comptroller spokesman Allen Spelce would speculate on how Texas lawmakers in 2018 would pay for the projected shortfall. Texas is among the many states with significant budget issues, but since 60 percent of the state’s revenues come from sales tax, Spelce says that revenues should rise “dramatically” once the economy improves. Lawmakers could also decide to use part of the state’s $9.4 billion “rainy day” fund to cover the projected shortfall.

But, “that is a decision to be made by the legislature,” Spelce says. For Virginia’s Prepaid Education Program (VPEP), strong market performance in 2010 was offset by higher than expected tuition increases and increases in the future tuition growth assumptions. As a result, net assets in the state’s “enterprise fund” increased by $76.6 million to an “actuarially determined” deficit of $207.4 million from a deficit of $284.0 million in the prior year (all VPEP activities and the plan’s operating activities are accounted the state’s enterprise fund.)

But Mary Morris, chief executive officer of the Virginia College Savings Plan, says that “actuarially determined” statements are just a “snapshot,” and are very different from statements of cash flow. “And there are absolutely no issues with cash flow in this program.” As such, the plan should continue to have no problem meeting its contractual obligations to participants, Morris says.

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

As of June 30, the total return since inception was just under 6 percent net of fees and reflected the prior year’s rebound in equity and fixed income markets. As of Sept. 30, the return on the VPEP investments since inception had risen to 6.35 percent. Morris said the return assumption would be reviewed at the end of its fiscal year in June, depending on how the investments are performing, and pricing for future contracts will be set.

The two principle pricing drivers are the return assumption and anticipated future tuition increases, Morris says. “Our goal is to be realistic and conservative in our outlook,” she says. “We want to make sure we can keep the lowest price possible, while still meeting our long-term obligations.” Karen Busanovich, a certified financial planner in Woburn, Mass., says that Massachusetts has a prepaid 529 plan that is guaranteed by the state, but most of her clients opt for plans offered by other states.

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

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

“Some years there will be excesses and some years there will be shortfalls,” Farmer says. “But the participating schools are in this for the longhaul, and the expectation is that they will break oven over time.” The plan has roughly $200 million assets under management and 8,000 accounts, but Farmer expects the program to grow in popularity. “We are the only prepaid 529 plan that isn’t sponsored by a state, so our consumers don’t have to worry about state budget problems affecting our plan.

The guarantees are made by the schools,” she says. While both traditional and prepaid 529 plans have had their share of challenges over the past several years, the advisors say they are still the best option for many families. Participants can invest reasonable amounts in either lump sums or through automatic monthly bank drafts, and in some states, they can get a tax deduction for their investment.

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

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

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

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