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Trending in 529 plans: Compliance-friendly share classes (1/2)
http://www.savingforcollege.com/articles/trending-in-529-plans-compliance-friendly-share-classes-1055

Posted: 2017-05-05

by Brian Boswell

Financial Professional Content

In the first half of our review of C to A Convertibles, SFC looks at what prompted their introduction, and which plans currently offer them to advisors and their clients.

Back in 2013 before the Department of Labor had handed down its decree on fiduciary standards Voya (then ING) launched a completely novel share class: Class C shares that automatically converted to a class A share after seven years (they don't have a formal moniker, so we'll tentatively call them C to A Convertibles).

This meant that the advisor could offer either a class A or class C share without worrying (as much) about suitability concerns. The client had to worry less about which share class to select. Compliance had to worry less about share class oversight. Everyone was happy. Today, there are a handful of investment managers who offer automatic conversions, and more are expected to follow.

The Fiduciary Rule

The Department of Labor Fiduciary Rule has become an omnipresent specter in the retirement space. And while the rule doesn't directly impact the 529 and college savings marketplace, it has and will continue to have a major impact indirectly:

  • Resources previously allocated to improving service and support of college savings products at many broker dealers and investment managers have largely been redirected to understanding and responding to the Fiduciary Rule. For several firms this delayed omnibus implementation, which is a potentially significant revenue loss.
  • Strategic planning by 529 plan providers and investment-only managers servicing those plans changed. What once was considered somewhat of a novelty, several firms followed Voya in launching their own version of the automatic C to A share conversion, and at least two more firms are rumored to be launching similar share classes later this year. 529 providers are looking closely at these share class structures as part of the means of ensuring future compliance with a possible fiduciary standard to college savers, and a seat at the table with major distributors that will prefer products using this or a similar share class structure.

Again, it might not apply today, but it's all too easy to see where the Fiduciary Rule could apply to other markets in the near future.

Plans that offer automatic share conversions

There are five plans that offer shares which transition automatically into a lower-cost class after a set period of time, though several plans have stated that they are either considering or planning to launch similar share classes in the near future.

Iowa: IAdvisor 529 Plan

Managed and distributed by Voya Investment Management

Class C shares have a 1% CDSC in year one only, but automatically convert to a class A share in year seven in the same month in which they are purchased. The dealer gets a 1% commission and 1% annual trail in month 13.

Rhode Island: CollegeBound 529

Managed by Ascensus and distributed by Invesco

For Class C Units purchased before July 8, 2016, the Units will convert to Class A Units after three years. For Class C Units purchased after July 8, 2016, the Units will convert to Class A Units after five years from purchase.

South Carolina: Future Scholar

Managed and distributed by Columbia Management

C shares, applicable to the investment option, is to automatically convert to A shares on the 5th anniversary of the investment into C shares.

Wisconsin: Tomorrow's Scholar

Managed and distributed by Voya Investment Management

Class C shares have a 1% CDSC in year one only, but automatically convert to a class A share in year seven. The dealer gets a 1% commission and 1% annual trail in month 13.

Virginia's CollegeAmerica plan, managed and distributed by American Funds, does not currently offer automatic share class conversions for its Class C shares. And while not disclosed in its plan disclosure, there is language on the American Funds web site under, "Class C and 529-C share conversions" that states,

"Class C shares automatically convert to Class F-1 shares in the first month of the ten-year anniversary of the purchase date. This is a nontaxable event that reduces the annual expenses you pay going forward. The new F-1 share account will have the same registration as the C share account. A proportionate amount of dividends will be exchanged into the F-1 share account."

This does not seem to have taken effect as of yet, but it is something being actively reviewed. There are at least two other 529 plans that are preparing to launch automatic share class conversions in 2017, but that were not ready to release this information publicly, yet.


In the second half of our review of Convertible C to A shares, SFC looks at the math behind the investments. Are they really better in all cases? What about over different time periods? And what are the potential drawbacks beyond raw returns?

Financial Professional Content

In the first half of our review of C to A Convertibles, SFC looks at what prompted their introduction, and which plans currently offer them to advisors and their clients.

Back in 2013 before the Department of Labor had handed down its decree on fiduciary standards Voya (then ING) launched a completely novel share class: Class C shares that automatically converted to a class A share after seven years (they don't have a formal moniker, so we'll tentatively call them C to A Convertibles).

This meant that the advisor could offer either a class A or class C share without worrying (as much) about suitability concerns. The client had to worry less about which share class to select. Compliance had to worry less about share class oversight. Everyone was happy. Today, there are a handful of investment managers who offer automatic conversions, and more are expected to follow.

The Fiduciary Rule

The Department of Labor Fiduciary Rule has become an omnipresent specter in the retirement space. And while the rule doesn't directly impact the 529 and college savings marketplace, it has and will continue to have a major impact indirectly:

  • Resources previously allocated to improving service and support of college savings products at many broker dealers and investment managers have largely been redirected to understanding and responding to the Fiduciary Rule. For several firms this delayed omnibus implementation, which is a potentially significant revenue loss.
  • Strategic planning by 529 plan providers and investment-only managers servicing those plans changed. What once was considered somewhat of a novelty, several firms followed Voya in launching their own version of the automatic C to A share conversion, and at least two more firms are rumored to be launching similar share classes later this year. 529 providers are looking closely at these share class structures as part of the means of ensuring future compliance with a possible fiduciary standard to college savers, and a seat at the table with major distributors that will prefer products using this or a similar share class structure.

Again, it might not apply today, but it's all too easy to see where the Fiduciary Rule could apply to other markets in the near future.

Plans that offer automatic share conversions

There are five plans that offer shares which transition automatically into a lower-cost class after a set period of time, though several plans have stated that they are either considering or planning to launch similar share classes in the near future.

Iowa: IAdvisor 529 Plan

Managed and distributed by Voya Investment Management

Class C shares have a 1% CDSC in year one only, but automatically convert to a class A share in year seven in the same month in which they are purchased. The dealer gets a 1% commission and 1% annual trail in month 13.

Rhode Island: CollegeBound 529

Managed by Ascensus and distributed by Invesco

For Class C Units purchased before July 8, 2016, the Units will convert to Class A Units after three years. For Class C Units purchased after July 8, 2016, the Units will convert to Class A Units after five years from purchase.

South Carolina: Future Scholar

Managed and distributed by Columbia Management

C shares, applicable to the investment option, is to automatically convert to A shares on the 5th anniversary of the investment into C shares.

Wisconsin: Tomorrow's Scholar

Managed and distributed by Voya Investment Management

Class C shares have a 1% CDSC in year one only, but automatically convert to a class A share in year seven. The dealer gets a 1% commission and 1% annual trail in month 13.

Virginia's CollegeAmerica plan, managed and distributed by American Funds, does not currently offer automatic share class conversions for its Class C shares. And while not disclosed in its plan disclosure, there is language on the American Funds web site under, "Class C and 529-C share conversions" that states,

"Class C shares automatically convert to Class F-1 shares in the first month of the ten-year anniversary of the purchase date. This is a nontaxable event that reduces the annual expenses you pay going forward. The new F-1 share account will have the same registration as the C share account. A proportionate amount of dividends will be exchanged into the F-1 share account."

This does not seem to have taken effect as of yet, but it is something being actively reviewed. There are at least two other 529 plans that are preparing to launch automatic share class conversions in 2017, but that were not ready to release this information publicly, yet.


In the second half of our review of Convertible C to A shares, SFC looks at the math behind the investments. Are they really better in all cases? What about over different time periods? And what are the potential drawbacks beyond raw returns?

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