NEW YORK – California last week kicked off a round of contract negotiations that could reshape the Section 529 college savings plan landscape.
New York-based TIAA-CREF has submitted a bid to renew its contract as program manager for the state’s $1.8 billion 529 college savings plan. It will battle Boston-based Fidelity Investments and the team of Needham, Mass.-based Upromise Investments Inc., and The Vanguard Group Inc of Malvern, Pa., which also submitted bids. A decision on the bid is expected by mid-March.
Bids for upcoming 529 contracts in other populous states such as Michigan and Pennsylvania are also expected to be extremely competitive. But states with smaller populations, such as Idaho and Montana, are drawing far less attention, and they are thinking increasingly about following Wyoming’s lead to fold their plan into ones in other states.
The 529 program manager with the most to lose in the upcoming contract talks is TIAA-CREF, which runs both California’s and Michigan’s 529 plans.
The non-profit organization, best known as a pension and insurance provider for college and university employees, was an early leader in the 529 business. But it has faltered in the past few years, losing contracts in such key states as Colorado and New York, and most recently, in Missouri late last year.
The juggernaut team of Upromise and Vanguard – which beat out TIAA-CREF in Colorado, Missouri and New York – is also expected to bid on the $1.1 billion Michigan 529 contract.
OppenheimerFunds Inc. of New York; Fidelity Investments and Putnam Investments LLC, both of Boston; and American Century Investments of Kansas City, Mo., are also expected to be active bidders for 529 contracts this year, say industry insiders.
While the 529 program manager market is widely expected to be consolidated this year, financial firms clearly are salivating over California’s asset-rich Golden State ScholarShare College Savings Trust program in Sacramento.
“This is as good as it gets; this is a crown jewel,” said Andrea Feirstein, managing member of New York-based AKF Consulting LLC. She is also a strategic adviser to California’s plan, working with the Encino, Calif., office of Portland, Ore.-based Pension Consulting Alliance Inc.
The fact that the California’s plan is well established is another major incentive.
“You can be profitable in Year 2 as opposed to Year 5 or 7 if the program is just starting out,” said Bill Raynor, vice president of college savings plans for OppenheimerFunds and vice chairman of the College Savings Foundation, a Washington-based industry trade group.
In its request for proposals, Ms. Feirstein said, California made it clear that it wants a program manager that has “an attractive set of investment options at a reasonable cost” as well the ability to conduct a “broad outreach” marketing campaign to the state’s diverse population.
The latter requirement may not bode well for TIAA-CREF, which, according to the state, fell way short of its 2004 goal for new accounts, reaching only slightly more than half of the benchmark figure.
Financial firms bidding on California and other states with 529 contracts up for renewal this year shouldn’t underestimate “the importance of pricing,” Ms. Feirstein told an audience of industry executives in a session devoted to RFPs at the College Savings Foundation Forum in Miami this month.
She pointedly referred to “an aggressive model out there that works” – a clear reference to Upromise and Vanguard’s low-cost strategy for administrative fees and passive index funds for direct-sold 529 plans.
That model seems particularly well suited to the Michigan Education Savings Program in Lansing, a direct-sold 529 plan which had 151,000 accounts and $1.15 billion in assets at yearend.
Its contract with TIAA-CREF expires at the end of September, and the state will issue an RFP in April or May, said Robin McMillian, executive director of the Lansing-based Michigan Education Trust.
While TIAA-CREF has given the state no indications about its plans regarding the new contract, she said: “My gut tells me they will [be among the bidders.]”
Pursuing a multimanager strategy is emerging as an alternative to a competitive bid for a solo-program-manager contract, industry insiders said.
Multiple platforms
“Get as many of your funds on as many platforms as possible,” Mr. Raynor told fund executives at the RFP session at the College Savings Foundation Forum.
Many in the industry expect that the number of those state platforms will be reduced in the near future, however.
Wyoming, which had fewer than 1,500 accounts and less than $20 million in assets in its College Achievement Plan in Cheyenne, has already said that it plans to shut down the plan.
It will place its account holders in Colorado’s CollegeInvest 529 College Savings Program in Denver.
Idaho, which just signed a stopgap six-month contract extension with TIAA-CREF through Sept. 30, is considering a similar move, according to Liza Carberry, investment manager for the Idaho State Treasury and chairwoman of IDEAL, the Idaho College Savings 529 program in Boise.
And Montana, which is evaluating bids for a 529 contract that expires at the end of April, is also researching the pros and cons of combining its Montana Family Education Savings Program in Helena with another state or states “the next time around,” said Karen Wing, deputy director and chief financial officer of the program.
Small assets
Regionalization makes sense, Mr. Raynor said, because 529 programs are expensive to run, and those with small asset levels will have difficulty attracting financial firms. Indeed, Ms. Carberry said, TIAA-CREF already informed Idaho that it isn’t interested in renewing its contract for the long term at the current fee level.
Whether the states involved are small or large, change is clearly in the air. “There’s no guarantee you’ll hold on,” Ms. Feirstein warned executives at the Florida conference.
And at the closing general session of that conference, Jackie Williams, executive director of the Columbus-based Ohio Tuition Trust Authority and chairwoman of the Lexington, Ky.-based College Savings Plan Network, a trade association for state 529 officials, said that financial firms that have had five to seven years of experience with a state 529 program “may not be able to meet new expectations. I do think there is a natural evolution occurring right now.”
