Keeping up with the graying of America is a big part of Rob Nestor’s job.

As senior director of product management for the iShares family of exchange-traded funds, he’s leading the push into retirement plans by Barclays Global Investors. One of those initiatives has been to leverage the asset manager’s leadership position in ETFs to forge new growth paths into 529 plans for college savings.

IndexUniverse.com Managing Editor Murray Coleman recently caught up with Nestor at BGI’s San Francisco headquarters for a progress report.

IndexUniverse: How big do you see the 529 market shaping up for ETF providers?

Nestor: If you look at our position in the ETF market as a whole, we’re the fourth-largest mutual funds company in the U.S. just based on the iShares assets. And certainly we think we can get to a similar size in the 529 market. Since that market is newer and we’re getting in much earlier, we’d expect to obtain an even greater portion over time. Right now, the 529 market is about a $120 billion marketplace. It’s projected to get to $250 billion by 2012.

IU: How early are you in terms of capturing that market’s growth?

Nestor: It only has begun to take-off in the past four or five years after legal reforms gave 529 plans their tax-free status. So it’s a relatively young financial instrument. The biggest player is American Funds with about $23 billion in assets under management. Vanguard is a close second at around $20 billion. After that, the drop-off is pretty significant.

IU: Those companies have made their inroads through mutual funds, haven’t they?

Nestor: Yes, that’s correct. American Funds goes through advisors and Vanguard relies more on the direct side of the business.

IU: What are the prospects for ETFs catching on in 529 plans?

Nestor: We’ve just launched the iShares 529 plan. It’s the first all-ETF plan for the 529 marketplace. It’s also the first one targeted to fee-based advisors, which is our core constituency in our ETF business. We’ve just started to market the iShares 529 plan and now it’s full-steam ahead.

IU: Do you see any back-office issues with using ETFs in 529 plans as have cropped up in 401(k) plans?

Nestor: These are treated as state municipal securities. So the tax treatment for 529 plans originates from each state’s particular tax system. So plans are offered more or less like wrap accounts. That means instead of investing directly in an ETF as a retail investor, you’re buying a pool or a portfolio of iShares.

IU: So how many different portfolios do you offer?

Nestor: There are 20 different portfolios. Nine of these portfolios are made up of single pools with just one iShare each. These are ETFs tracking broad market indexes from the Russell 1000 to the Russell 2000 and the MSCI EAFE. We’ve also got pools for the MSCI Emerging Markets index, a real estate index and several bond indexes.

Four other ETF pools make up asset allocation portfolios. And then seven others are target-enrollment portfolios. They’re the equivalent of the 401(k) target-date retirement funds.

IU: What’s the cost on these?

Nestor: It depends what investment you select. The average is 63 basis points, including all fees. On the low end, it’s 50 basis points. At the high-end, if you put all of your assets in the emerging markets portfolios, for example, you’d pay 1.1%.

IU: You could buy the Russell 1000 and the Russell 2000 ETF and control your costs that way, couldn’t you?

Nestor: That’s right. As far as we know, there’s only one plan cheaper than us on the advisor side. When these plans were first marketed, most of the money flows went to the direct marketed plans. But now that has shifted and most of the activity is on the advisor side.

IU: Do you see any movement on the 401(k) side with ETFs?

Nestor: Most of the movement is behind the scenes. The primary challenge is the record-keeping platforms. Those just weren’t built to account for traded securities. You can’t trade securities in fractional shares so when you have ETFs there has to be some sort of system developed for accounting for those fractions. In order to avoid significant commissions and other trading costs, you’ve got to be able to roll up all of a plan’s participants’ executions of orders at certain times during the day. There are several platforms that have those capabilities today. But they’re smaller players and it’s very difficult for a 401(k) administrator to change record keepers.

IU: How close to you think we are to seeing more wide-spread use of ETFs in 401(k) plans?

Nestor: Some of the bigger record keepers are moving aggressively. Their timelines point towards the end of the year and the first quarter of 2009 for making the necessary changes. We’ve received a lot of inquiries from our clients interested in taking advantage of these capabilities. Roughly 40% of the advisors we’ve surveyed using iShares today are involved with 401(k) related business and want to see ETFs made available in those plans.