Firms Pursue College Savings Market
July 3, 2000
The burgeoning state-sponsored college tuition savings plan market is beginning to attract the interest of mutual fund companies.
Several firms, including Fidelity Investments of Boston, Strong Capital Management of Menomonee Falls, Wis., Vanguard Group of Malvern, Pa., TIAA-CREF of New York, Salomon Smith Barney of New York and American Century Investments of Kansas City, Mo. have been angling to get into the market. The savings plans are referred to as 529 plans after the IRS code that authorized them.
Not only do the plans afford fund advisers the opportunity to scoop up long-term investments, but fund companies gain access to a whole new audience of investors. The plans give firms the opportunity to get their names in front of a new generation of potential investors - college-bound students, fund executives said.
While state treasuries are the sponsors of these programs, investment managers are hired to handle the investment management and often the plan administration. The plans differ considerably from state to state.
Mutual funds are used as the underlying funding vehicles for these plans. Most plans offer investors non-negotiable, pre-assembled fund portfolios. Plan participants are assigned portfolios that differ according to the allocations between equity, bond and money market funds depending on the age of the child for whom the account is established. Under Federal law, account owners of state-sponsored qualified tuition savings plans may not exercise investment discretion over their accounts.
Also, under their contractual arrangements, mutual fund companies themselves are expected to market the plans. Since 529 plans in most cases can be purchased by residents of any state (Oregon is the only exception) mutual funds can develop marketing campaigns they can use nationwide to attract dollars to an individual state-sponsored plan.
American Century recently won the right to manage and administer Kansas' tuition savings plan that was introduced July 1. The fund group has not been actively marketing to other states, but managing the Kansas plan made sense because one-third of its employees are Kansas residents, said Beth Randolph, a spokesperson for American Century. The Missouri plan is managed by TIAA-CREF.
TIAA-CREF began managing assets under these plans in 1998, said Tim Lane, vice president of tuition financing at TIAA-CREF. TIAA-CREF now has $605 million in 529 plan assets, he said. TIAA-CREF already manages the state tuition savings plans of New York, California, Connecticut, Kentucky, Vermont, Tennessee, and Oklahoma as well as of Missouri. A Minnesota plan, also managed by TIAA-CREF, is expected to begin this month, said Lane.
Fidelity has been managing the Massachusetts tuition savings plan since January 1999, said Abram Claude, vice president of college planning at Fidelity. It has also managed New Hampshire's 529 plan since 1998. Fidelity announced last month that it would introduce a version of its New Hampshire plan for the financial advisor marketplace, to be called the Advisor College Investing Plan.
In early June, Strong was awarded its first contract to manage the college savings program for Oregon which will begin accepting pre-enrollments in October and November.
"We feel these 529 savings plans are about the best kept secret in college savings," said Sarah Henriksen, marketing manager for tax advantaged products at Strong.
Illinois recently awarded its 529 management contract to Salomon Smith Barney, which manages Colorado's and others.
Idaho and Nebraska are currently accepting proposals from investment managers. Ohio, Rhode Island, Florida, Alaska and Hawaii are currently evaluating proposals and expect to introduce their versions of state tuition savings plans later this year.
The plans allow investors to establish and contribute to investment accounts that will eventually be used by a beneficiary/student to pay for college tuition, books, room and board and other qualified fees at any accredited college nationwide.
Contributors generally receive a 100 percent income state tax deduction for annual contributions made up to a maximum set by the state.