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529 E-ditorials

03-4: The Tiger Woods College Savings Plan
Joe Hurley
Wednesday, August 27th 2003

Have you seen the Nike commercial starring Tiger Woods and his talking club-head cover, Frank? While sitting at the lunch counter, Frank decides to give Tiger some uninvited golf-equipment advice. Tiger gently snaps back: "And you can always be replaced."

The State of New York sounded a similar wake-up call to service providers in the 529 industry last month with its announcement that long-time vendor TIAA (part of TIAA-CREF) would be replaced as program manager of New York's College Savings Program. Upromise Investments Inc. will be stepping into that role this fall, teaming with Vanguard Group (for the direct-sold program) and Fleet Bank's Columbia Management Group (for a broker-sold program).

The decision came as a surprise to many in the industry. TIAA had helped to build New York's 529 plan from scratch to become one of the largest in the country, with over $1.8 billion in assets at June 30, 2003. The program was the crown jewel in TIAA-CREF's very substantial 529 tiara (12 other states use the company). The financial-services giant had committed substantial resources to developing and administering the program, agreed to restrict its marketing to New York residents, and kept program expenses among the lowest anywhere.

So how could such a change occur? Simple. The original five-year contract between New York and TIAA ended. New York re-bid the program-management services, as it had planned to do from the very beginning, and the Upromise consortium delivered the proposal that best met New York's selection criteria. TIAA's proposal fell short. End of story, right? Not quite. Program participants are now left to wonder what will happen to their investments under new management and new investment portfolios.

Like many investors, you probably assumed you were committing to a particular investment manager when you signed up with a 529 plan. But every time a state decides to hire an outside financial services firm to run its 529 program, it's with the understanding that "you can be replaced" when the contract expires. Contracts run from two years to 30 years depending on the particular state.

The implications of such an action are mixed. On the one hand, it's comforting to know that the state is working on behalf of its participants to secure the best 529 deal it can produce. You have to believe that New York officials did their homework in evaluating proposals and that they determined the winner based on careful analysis and consideration. The state's ability to attract competing bids, and its substantial efforts to perform due diligence, is an investor benefit unique to 529 plans.

But on the other hand, contract re-bidding doesn't necessarily mean the program will get better. An unsatisfied vendor is provided the opportunity to change its deal. After all, few program managers are making any money in the 529 business. The current vendor could simply decide to exit the business. More likely, it will seek an increase in fees. One would like to believe that competitive forces will act to keep fees low. After all, a successor manager steps into the investment assets accumulated through the incumbent manager (the New York deal provides TIAA with a five-year transition period). But low-fee bids won't always happen, particularly where the state is perceived to be difficult (i.e. expensive) to deal with, or where the program is not likely to attract a lot of assets.

What can you do if the 529 deal you signed up for takes a turn for the worse somewhere down the road? Fortunately, you can transfer your account to another 529 plan without triggering federal tax or penalty (but only once in a 12-month period). Remind your 529 plan that it, too, can always be replaced.

» 05-4: The 529 marshals have arrived - 08/30/05
» Our 5.29th-year anniversary - 06/29/05
» 05-2: 529s and the new Bankruptcy Act - 04/28/05
» 05-1: Reform or Deform? - 02/27/05
» 04-6: Perspectives on the 529 debate - 12/28/04
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