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Exploring 529 Market Expansion

In an effort to gain access to the education savings market, investment management companies are increasingly looking to partner with existing state-sponsored "529" college savings plans (See MFMN, 9/3/01). But standards don't yet exist for 529 partnerships, so the nature of the arrangements among these companies is different with each one.

Each state can offer a 529 plan in conjunction with an investment management firm. That has created a somewhat limited market, because, unlike 401(k) and IRA plans, the 529 plans are limited to one per state, and some states are only offering them to in-state residents.

Currently, over 35 states offer plans, and almost all of the remaining ones have commitments from investment companies or are taking proposals for their plans right now, according to Joseph Hurley, CEO of of Pittsford, N.Y.

To counter that, firms have begun partnering with existing plans.

That can be advantageous for the original plan sponsors because partners can bring resources such as additional distribution and marketing capabilities. Thus far, each program has come to a different partner arrangement and is utilizing those additional resources in a slightly different way, according to industry observers.

"It's a developing market. I don't think there's any set way that it's happening," said Sandra Forcier, director of marketing for Schoolhouse Capital, of 529 partnerships. "There are players playing all the roles themselves. There are players that are more in a shared environment, and then there are players that are truly administrative."

Separate Schooling Subsidiary

Schoolhouse Capital was established late last year by State Street Global Advisors as a separate subsidiary to focus specifically on the education savings market. Schoolhouse administers a 529 plan in New Mexico and has recently announced partnerships for that plan with OppenheimerFunds and New York Life Investment Management. Previously, the New Mexico plan was distributed directly through E*TRADE and through employer work sites.

With the formation of these partnerships, Oppenheimer and NYLIM will both provide distribution channels for the plan in addition to adding their own investment options. And in Schoolhouse's arrangement, the 529 plan will be co-branded using all three company names, according to the company. While Janus, INVESCO and MFS all have investment options within the New Mexico plan, none have entered an agreement with Schoolhouse to offer additional resources.

AIM Management Group has partnered with 529 plans in Maine, Alaska, and Nebraska, but in very different ways. In Maine, Merrill Lynch is the program administrator and distributor and AIM only acts as a product provider, according to a company spokesman. In Alaska, T. Rowe Price Assoc. is the administrator, ManuLife acts as a distributor, and again AIM simply offers some of its products within the plan.

In Nebraska plan, however, AIM has taken on a much more extensive role. Union Bank & Trust is the program manager there, and earlier this month AIM partnered with the company to provide investment products, management and distribution, as well as to act as a servicing agent for the plan, the spokesman said.

Partnership Plan

State Street's Schoolhouse Capital anticipated that 529 plans would rely on partnerships as the plans were becoming more widely adopted, said Forcier. As a result, the company has worked specifically to make it easy to partner with it within the 529 landscape, she said. "As different players come to the market, I think there are two things they're looking at. One is, What is my opportunity to get in on the state level?' And the second is, What are the cost ramifications of that?'"

In a down economic market everyone wants to maximize opportunities but minimize expenses, she said. "Companies are now saying, We want to get into 529s quickly and soundly with a partner that already has a lot of the pieces and focus on the bells and whistles like multi-manager, custom choice, and online technology.' And Schoolhouse has an important role in that."

When the State of Nevada signed an agreement with Strong Capital Management to administer its 529 plan late last month, Nevada State Treasurer, Brian Krolicki, insisted that the agreement incorporate additional investment managers to offer products to and distribute the plan, he said. Nevada officials already have three distribution partners lined up, although those have not yet been announced, according to Strong. States want to attract 529 assets because they get a portion of the management fees and are increasingly looking to offer plans with multiple investment offerings and distribution channels, said Hurley of

Complex Administration