Administering 529 College Plans Requires Individual Attention
June 24, 2002
While there has been a lot of emphasis on the predictions of billions of dollars flowing into 529 college savings plans, little has been said about the difficulties in operating these plans on a day-to-day basis.
Investment managers are well experienced in administering SEC-regulated mutual funds, but 529 plans are a different and far more complicated matter altogether. Because they are sponsored by individual state treasury departments, each 529 plan is considered a registered municipal security and is governed by the rules of the Municipal Securities Rulemaking Board, not the SEC.
For fund companies that sell through intermediaries, that means that they must obtain new selling group agreements for each distribution partner within the broker/dealer community. They cannot piggyback the new product onto existing selling agreements, said Jim Pasman, managing director and senior vice president of operations at PFPC of Wilmington, Del. PFPC currently services 529 plans for 11 states.
Because no two 529 plans are exactly alike in terms of features and underlying investment options, each back-office system must be custom built to support the peculiarities of each state plan, he said. In addition, unlike traditional mutual fund accounts, both multiple plan beneficiaries and multiple contributors must be carefully tracked, Pasman said.
That has made it necessary for transfer agents providing the record keeping for 529 plans to manually build the technology, operating and accounting systems to process information about contributors and beneficiaries, Pasman said. "Operationally, 529 plans are more difficult," he said. "It takes a minimum of two to three months to get a 529 record-keeping system up and live."
Furthermore, because 529 plans are a new breed of investment, additional regulations are pending and are expected to change at least some of these plans' features. Consequently, Pasman said, PFPC has learned to build a flexible system that can easily adapt to new requirements.
Training is Key
In many cases, 529 shareholder servicing must be improved, whether it's the transfer agent or fund company answering calls from college savings plan investors. Telephone representatives must be adequately trained so that they understand the details of a particular plan as well as how it compares to other savings vehicles such as Uniform Gift to Minor Accounts and Coverdell savings accounts, Pasman added.
Education has to extend beyond the call center, as well. For mutual fund companies that administer, manage or distribute 529 plans, educating and communicating the aspects and benefits of these plans to various audiences can prove highly challenging.
"They are extraordinarily complex, and the devil's in the details," said Renee Campis, an executive vice president with Delaware Investments of Philadelphia. Delaware currently administers the 529 plan for the state of Hawaii, and in January of this year won the right to manage the college savings plan for Pennsylvania. "You have to make a commitment to offer comprehensive training for participants and intermediaries," he said.
It's not just potential investors, financial intermediaries and call-center reps who must have a full grasp of 529 plans. "When we got this product, we recognized investors, financial advisors and, quite frankly, our own sales force needed to be properly educated about 529s," said Gary Terpening, a vice president with Seligman Advisors of New York, the fund distribution unit of J&W Seligman. "The challenge is to make our [30 field] wholesalers into experts in the product." Seligman manages one of five investment options for North Carolina's 529 plan and is the exclusive distributor of all five product options.
One of the ways Seligman is working to make its wholesalers into experts on 529s is by informing them of the questions investors are asking call-center reps about these new products, Terpening said. In addition, whenever any regulatory or legal change is made to a 529 plan, Seligman sends updates to its wholesalers, he added.
Besides the overwhelming education challenge that 529s pose, another important task is automating trades in and out of various 529 plans on a day-to-day basis, in much the same way mutual fund trades are now cleared through the Fund/SERV system of the National Securities Clearing Corp. (NSCC) of New York, said Ann Bergin, managing director of NSCC, which is a subsidiary of The Depository Trust & Clearing Corp.
Since 1986, Fund/SERV has been the industry standard for transmitting mutual fund registration and settlement information. Last year, in an attempt to set a similar standard for 529 plans, the NSCC began working with the Investment Company Institute as well as members of the fund operations community. This past November, NSCC debuted initial modifications to its current mutual fund platform to accommodate 529 plans, Bergin said. More changes are planned. "We're working through functional, operational, legal and regulatory issues," Bergin said.