California has picked TIAA-CREF to manage its college-savings plan that has about $4 billion in assets.
The ScholarShare Investment Board, which oversees the state's 529 program, voted today to award New York-based TIAA- CREF a five-year contract for its plan sold directly to investors, Joe DeAnda, a spokesman for California Treasurer Bill Lockyer, said in a telephone interview.
Fees on average will be lower than those charged by the current manager, Boston-based
Fidelity Investments, which didn't bid for the contract. TIAA-CREF will have eight people in California dedicated to promoting the accounts, including two bilingual speakers, and will spend $10 million a year on marketing, or double that of Fidelity, DeAnda said.
“We think with TIAA-CREF, and the marketing plan they presented and they'll provide, that we're going to be able to make more headway in extending this product to working folks in the middle class,” said Tom Dresslar, a spokesman for the treasurer's office.
The 529 plans, named after a section of the U.S. tax code, are set up by states. Investment earnings generally are free of state and federal taxes when used to pay for eligible education expenses. California's program had about 280,000 accounts with $4.2 billion, Teri Ginsburg, a spokeswoman for Fidelity, said. Assets in 529s nationwide totaled $149 billion as of April, according to the Chicago-based research firm Morningstar Inc.
TIAA-CREF is a financial-services firm serving educational and other non-profit employees. It's the largest U.S. manager of retirement plans for teachers and academic researchers and also currently administers college savings plans in nine states, said spokesman Chad Peterson. The California contract provides for five, one-year extensions after the initial term, Dresslar said.
Cost of Education
College savings plans are “critical” because of the cost of education today, Dresslar said. Tuition and fees for in-state students at public four-year institutions averaged $7,605 for the 2010-2011 school year, according to the College Board, a New York-based nonprofit. At private nonprofit four-year colleges and universities, it's $27,293.
California took bids through May 2 for management of its two 529s, one sold directly to investors and the other offered through financial advisers. The state did not receive any bids for its adviser-sold plan and is still reviewing options for management of that program, according to DeAnda. The state's contracts with Fidelity are scheduled to expire in November, he said.
Fidelity was the third-largest administrator of 529s as of the first quarter after American Funds, a unit of Los Angeles- based
Capital Group Cos., and Upromise Investments Inc. in Newton, Massachusetts, according to the Financial Research Corporation in Boston. TIAA-CREF ranked fifth with $7.8 billion in plan assets, FRC data shows.
‘Race to the Bottom'
The “race to the bottom” on 529 fees in recent years may explain why the state received only two bids, said Dresslar. Some firms may have thought they couldn't be competitive on costs, he said. California also received a bid for its direct- sold plan from Union Bank & Trust Co. in Lincoln, Nebraska.
The average annual fee for plans sold directly to investors was about 0.65 percent as of October, down from 0.72 percent in February 2009, according to the College Savings Plans Network.
Fidelity managed more than $17 billion in 529 assets in five states as of March and has managed California's direct-sold and adviser-sold plans since November 2006, Ginsburg said.
“Fidelity made a strategic business decision not to bid for the ScholarShare and ScholarShare Advisor College Savings Plans and we will focus efforts in California on our growing IRA, brokerage, retirement, workplace, financial adviser and institutional businesses,” Vincent Loporchio, a Fidelity spokesman said in an e-mail.
Reduced Fees
Fidelity reduced charges on its 529 plans nationwide in December 2009. Fees range from 0.25 percent to 0.35 percent for index funds and 0.59 percent to 1.06 percent of plan assets for actively managed portfolios, data from Fidelity shows.
Fees for California's direct-sold plan will be reduced under TIAA-CREF's management to an average of 0.23 percent for index age-based portfolios and 0.58 percent for those actively managed, according to a report by the ScholarShare board. Investors also will have more investment choices including funds from TIAA-CREF, T. Rowe Price Group Inc. and Pacific Investment Management Co., while Fidelity only offered funds it manages.
New York also put its plan out for bids and expects to choose an administrator by August, said Vanessa Lockel, a spokeswoman for the state comptroller's office. The current contract is with Vanguard Group Inc. as the investment manager and Upromise Investments, which administers the accounts. New York has the largest direct-sold plan in the U.S. with $9.9 billion in assets at the end of the first quarter of 2011.
Tax Deduction
About three-quarters of states offer a tax deduction or credit for a portion of contributions residents make to the accounts, according to Morningstar. California doesn't, which may be another reason it didn't receive many bids, Dresslar said.
“Given our fiscal difficulties here that is not going to happen any time soon,” Dresslar said of the potential for starting a tax break for contributions. “It's just not in the cards now until the budget gets straightened out.”
--Bloomberg News--
