TIAA-CREF stages 529 comeback

NEW YORK — TIAA-CREF wants to be a contender in the Section 529 college savings plan business — again.
And the renewal last month of its three-year contract to manage Michigan’s $1.6 billion Education Savings Program means the giant money management firm has a shot at coming back, with some challenges, industry observers say.
Once the leading program manager in the industry, the New York-based non-profit, best known as the primary pension and insurance provider for college and university employees, has been in a prolonged 529 slump, losing contracts for such key states as New York, California and Missouri in the last two years.
Earlier this year, TIAA-CREF lost out to New York-based OppenheimerFunds Inc. for the much-sought-after seven-year contract to manage Illinois’ $2.1 billion Bright Start College Savings Program, which is based in Chicago.
But in what may have been its last chance to stay in the 529 game as a major player, TIAA-CREF snagged the Ann Arbor-based Michigan contract, despite strong competition from industry heavyweights Upromise Investments
Inc. of Needham, Mass. (teaming with The Vanguard Group
Inc. of Malvern, Pa.), Boston-
based Fidelity Investments and OppenheimerFunds.
“It was a very substantial win,” said Peter Mazareas, treasurer of The College Savings Foundation, a Washington-based industry trade group, and chief executive of Nahant, Mass.-based Strategic Advancement Group Inc. “This keeps them in the business.”
“It is a big win,” agrees 529 guru Joe Hurley, president and chief executive of Pittsford, N.Y.-based Savingforcollege.com LLC. “But it remains to be seen what TIAA-CREF will end up with.”
Future plans
Going forward, the company said that it does not plan to emulate the national, adviser-sold strategies of Los Angeles-based American Funds Investment Co., which leads the industry, with more than $20 billion in assets running the Richmond-based Virginia College Savings Plan, or New York-based AllianceBernstein Investments Inc., which sells nationally Rhode Island’s CollegeBound Fund plan in Providence, making it the industry’s third-largest program manager, with about $8 billion in assets.

Doug Chittenden, vice president of institutional product management for TIAA-CREF and president of its Tuition Financing Inc. division, said the company’s “historical mission” of “helping as many people save for college as we possibly can” will remain a priority as it continues to work with states that want “a broad distribution [of 529 plans] to as many citizens as we can possibly reach.”
However, he added, TIAA-CREF does want to forge alliances with program managers having adviser-sold expertise, as it unsuccessfully attempted to do with OppenheimerFunds when the two companies were vying for the Illinois contract several months ago.
“We will focus directly on the client,” Mr. Chittenden explained, “but if states want more options, we can bring in another firm with that expertise. Not many firms do both [selling directly to consumers and selling through broker-dealers] well.”
Despite not reaching an agreement with TIAA-CREF in Illinois, Raquel “Rocky” Granahan, vice president and director of 529 college savings plans for OppenheimerFunds, said that TIAA-CREF will “absolutely” have “more opportunities for partnerships” in the future.
The right partners
“They’ll have to find the right combination,” she said, “but there’s no reason they wouldn’t be able to. They’re in a very good position and are still a strong presence in the business.”
TIAA-CREF’s challenge will be to find an adviser-sold program manager seeking a direct-sold partner, said Andrea Fierstein, managing member of New York-based AKF Consulting LLC.
Nonetheless, she said, if seeking such a partner now is part of TIAA-CREF’s 529 strategy, “then their business is going in the right direction.”
As increased competition for state contracts and growing economies of scale have pushed 529 plan fees lower, TIAA-CREF’s ability to maintain its economic viability in the business has been questioned.
To win the contract for the Michigan plan, TIAA-CREF reduced the fee charged to account owners to 0.45%, from 0.6%.
“I don’t know how they’re able to make money,” said one executive for a rival program manager, who asked not to be identified.
But managing a total of nearly $5 billion in programs for nine states gives TIAA-CREF “the scale to do it profitably,” Mr. Chittenden said, noting that the firm is a manufacturer of “low-priced investment products,” including mutual funds and index funds.
What’s more, he noted, the company’s 529 business has been growing rapidly since last summer, when federal tax exemptions provided by 529 plans became permanent under the Pension Protection Act.
The increased attention to 529 plans as a college savings vehicle, Mr. Chittenden said, has resulted in increases of 20% to 30% in both assets and number of accounts in the programs the company manages.
In addition to lower prices and increased volume, TIAA-CREF has stayed competitive with rivals such as the Upromise/Vanguard team by partnering with Philadelphia-based specialty retailer Mothers Work Inc. to offer the Futuretrust 529 rebate program for retail purchases and mortgage transactions.
Added value
The Futuretrust program has been “very innovative” and has given TIAA-CREF’s 529 offerings a boost, said Brian Boswell, research analyst for Boston-based Financial Research Corp. “It gives them extra value they didn’t have before.”
Futuretrust rebates are “a nice value-added to our offering,” Mr. Chittenden said.
However, “our approach isn’t built on selling credit cards,” he added — seemingly taking a jab at promotion-oriented Upromise.
TIAA-CREF’s approach traditionally has centered on a deep roster of states, including those with smaller plan assets, but that may be changing.
Mr. Chittenden said that the company continues to be “very interested in looking at other states,” but on a selective basis.
Earlier in the year, TIAA-CREF signed a three-year extension to continue managing Vermont’s $62 million Higher Education Investment Plan in Montpelier, but last month, Idaho’s IDeal 529 program in Boise, which had been managed by TIAA-CREF for the past six years and which has only $113 million in assets, signed a new five-year contract with Upromise and Vanguard.
Georgia this month is set to renew its contract with TIAA-CREF to manage its Higher Education Savings Plan in Atlanta for five more years, according to Chuck Penuel, director of the program.