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West Virginia Taps DFA for New 529


At first blush, it may appear to be the odd couple marriage of the 529 college savings plan market.

West Virginia has just announced that it has tapped the academic-minded Dimensional Fund Advisors (DFA) of Santa Monica, Calif., to become the sole investment manager for its new SMART529 Select program. This program will be offered without a sales charge directly to investors nationwide with a minimum investment of $500. Ten static portfolios and seven age-based investment choices will be available, each utilizing DFA's no-load, 12b-1-free mutual funds.

The deal marks DFA's entry into the burgeoning $54 billion 529 plan market and the first time DFA has agreed to offer its research-driven mutual funds to those saving for their children's and grandchildren's college expenses. "It's an attractive market because it plays right into our philosophy of working with people who take the same view of sticking with an asset allocation," said John Siciliano, director of global institutional services at DFA.

DFA isn't your typical investment management firm hungrily eyeing the 529 plan market. In fact, the firm has shunned potential suitors in the past because they requested that DFA pay fees to offset the administrative costs of the plan, Siciliano said. "We just don't do that," he said.

DFA, with $62 billion under management in mutual funds, collective trusts and separate accounts, is a well-respected firm, known for its academic roots and research. The low-key firm doesn't advertise but works closely with 1,000 financial advisers, including a core group of 500 who are well-schooled in the disciplines of the DFA investment philosophy.

So, why say yes to participating in West Virginia's college savings plan? "We are doing it because we have a long-term relationship with them," Siciliano said, referring to DFA's management of a portion of West Virginia's pension plan. "They understand our philosophy and our process." Moreover, the new alliance allows those DFA-loyal financial advisers to offer a 529 plan utilizing DFA funds to clients. Many advisers have been seeking a DFA-based college savings product, he said.

"We have had experience with DFA, and we've had exposure to their investment philosophy through our pension plan," confirmed Charles Bockway, deputy of West Virginia's treasurer's office. In fact, the state didn't go through a formal request for proposal process before selecting DFA. "We loved their management style and their performance," Bockway said. Furthermore, since The Hartford is handling all of the administration and account servicing in the 529, DFA can focus on investment management, Bockway noted.

Catering to Different Niches

This marks the fifth college savings plan that West Virginia has adopted since early 2002. All told, the state has a collective $443 million currently spread across its plans and more than 48,000 college savings accounts. The WV College Prepaid Tuition and Savings Program Board of Trustees is responsible for the plans. The Hartford is administrator for all five plans.

The relationship with DFA allows West Virginia to offer a low-cost 529 plan option to investors. "We did see there was a whole category we weren't serving: those looking for lower costs," Bockway added.

Up until now, West Virginia has had four other college savings plans, three of which are available nationally, and one of which, the West Virginia Smart529 Direct, is available only to West Virginia residents. The state also has a prepaid tuition plan that closed to new contributions in March 2003.

Its flagship Director Smart529 Plan utilizes only mutual funds from Hartford and still brings in the most new assets, Bockway said. Its Leaders Smart529 Plan offers a broader array of cherry-picked funds from various investment managers including AIM Investments, American Funds, Franklin Templeton, Invesco Institutional and MFS Investment Management.

West Virginia also offers the Cornerstone Smart529 Plan, which taps into the investment prowess of American Funds, Federated Investors, Goldman Sachs, Lord Abbett, Putnam Investments, Van Kampen and Wellington Management. It is distributed exclusively through brokerage Edward Jones' legions of financial planners, often single-person offices in rural and local markets.

It was actually the folks at Hartford who had a relationship with Edward Jones but saw an opportunity for West Virginia to partner with them, Bockway said. "Jones serves the average, middle-income family, and that's our focus, our market," he added. Across the plans, almost one-third of current 529 plan holders are making automatic payments to their accounts, and of those, 80% are less than $250 per month, he noted.

The 529 Plan Umbrella

"I think you will see more states operating under an umbrella plan [offering a variety of choices], although there could be some contractual issues surrounding exclusivity agreements, such as the one New Hampshire has with Fidelity and Virginia has with American Funds," said Whitney Dow, a 529 plan specialist with Financial Research Corp. of Boston.