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Hitting Oregon's 529 Trail


New Mexico is not the only state forced to pare back 529 providers, due to Schoolhouse Capital's recent exit from the college savings market. In fact, Oregon has had to twice revamp its 529 plan within the past two years due to unusual circumstances.

In May 2003, the State of New Mexico hired Schoolhouse Capital to manage several 529 college savings products, including a new adviser-sold 529 plan, dubbed USACollege Connect, that utilized mutual funds managed by Federated Investors of Pittsburgh.

At the end of 2004, after Schoolhouse announced its imminent retreat, the $13 million plan was terminated and assets were transferred to a second 529 plan, which MFS Investments of Boston had been managing for New Mexico since August 2002.

Mix-and-Match

In hindsight, although Schoolhouse Capital had been brought in to provide recordkeeping and a third-party mix-and-match product for the state, its business model was "inherently more expensive," said Michael Parker, executive director of the Oregon 529 College Savings Network.

"The program manager with no funds in the game has to make money somehow," Parker added.

Meanwhile, in November 2003, amid allegations that Strong Capital Management's founder, chairman and CEO Dick Strong had been market timing on his own behalf, the Oregon College Savings Board terminated Strong as the manager of its other three-year-old 529 plan (see MME 11/24/03).

As a result, in February 2004, Oregon hired OppenheimerFunds as replacement manager for its direct-sold 529 plan, and added index funds from Vanguard Group to the direct-sold 529 plan's investment mix. The reconfigured plan, which now includes actively and passively managed funds, went live in August 2004.

Determined to Slash Fees

The silver lining was that the termination of Strong, whose plan had fees of 1.25% across the board for both aggressive and conservative portfolios, caused the Oregon College Savings Board to rethink its fees. Determined to slash fees, it was able to lower fees within the OppenheimerFund's side of the plan to 1.04%, inclusive of management fees. The state also demanded Vanguard's portion, which includes four index funds, to come in well under 1.00%, all fees inclusive, Parker said.

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