New York State may have changed the way financial companies compete in the 529 college savings plan market when it replaced TIAA-CREF as the manager of its program with Upromise Investments, Vanguard, and FleetBoston's Columbia Management Group.
Cost was probably an important factor - one person familiar with the bidding said the new team's proposal came in some 20 basis points lower than the 60 basis points TIAA-CREF charged investors in the New York plan. But also important, many said, was the fact that the new management group's adviser-sold platform offered a distinct sales advantage over TIAA-CREF's direct-sold model.
Andrea Feirstein, an independent 529 plan consultant who advised New York on the switch in plan administrators, said ever more states are offering a 529 plan that can be sold through advisers. "States have accepted that this is a product that is sold and not bought," she said. "If the adviser community can help sell 529 plans, then the state is happy. States want people to save for college."
New York Comptroller Alan Hevesi announced July 31 that the state would not renew TIAA-CREF's mandate to administer the state's 529 plan. The New York company, an annuity and retirement fund provider for educators, was the nation's largest 529 plan manager at June 30, with $3.98 billion of assets under management in 13 state plans. Nearly half that total - $1.8 billion - was in the New York program.
Program managers and analysts say this is a cautionary tale for 529 plan providers; renewals are not automatic in a marketplace with a limited number of plans to run.
"I think there is always an opportunity for firms to look at states and look to make competitive bids to become a new program manager," said Chuck Toth, the chairman of the College Savings Foundation and director of Merrill Lynch & Co.'s Education Savings Network. "You will see over time that states will select new managers. It is the state's program, and they will do that. You will see this dynamic more frequently."
Mr. Toth said providers must realize that states want their programs to grow. States reap fees for each savings account opened. Maine, for example, whose plan is administered by Merrill, uses its fees to fund scholarships for students who otherwise could not afford college, Mr. Toth said.
TIAA-CREF had run New York's plan since it opened in 1998 and is the first provider to be replaced when its contract came up for renewal.
Compared to other large 529 programs, TIAA-CREF's New York plan had recently posted the slowest growth and was only No. 4 out of the five largest state plans. The New York program grew 14.4% in the second quarter, to $1.84 billion, according to Financial Research Corp., a Boston company that tracks 529 plan assets. In the same period, Virginia's 529 plan assets grew 34.3%, to $3.4 billion.
Diana Cantor, the executive director of the Virginia College Savings Plan and chairman of the College Savings Plan Network, said, "New York felt that the proposal by this new group was more beneficial to their residents and they changed plans."
The Upromise-Vanguard-Fleet combination offered New York more distribution points than TIAA-CREF, a multi-product platform, sales through advisers, and lower costs.
New York was not the first state to turn away TIAA-CREF, Ms. Cantor said. Last year, Florida had named TIAA-CREF to manage its 529 plan, then reopened the search and eventually decided it would be its own plan administrator.
Ms. Feirstein, the adviser on New York's switch in plan administrators, said it had closely compared the proposals from each. "This is the first big contract to come for renewal, and I don't know that it predicts how other states will act," she said. "It is early to call this a trend."
Jim Tambone, a co-president of Columbia's Liberty Fund Distributors, said New York chose his group because it could offer an adviser-sold, multimanager platform that TIAA-CREF lacked. New York has the largest direct-sold platform in the United States, but in the past three years, 529 plans increasingly were being sold through advisers.
"I can't speak for New York, but from our side of the equation the adviser-sold product is the model of choice," he said. "We were enthusiastic that an adviser-sold model was the way to win the mandate from New York."
David Neustadt, a spokesman for the New York Comptroller's Office, said the state would not comment on contract negotiations with the new group. A contract should be completed in the next couple of weeks, he said.
Financial Research Corp. said that 68% of 529 plans were sold through intermediaries last year. In the fourth quarter of 2000, only 20% were sold through advisers.
"The market has really figured out that the adviser can make a difference in getting the word out about 529 plans," Mr. Tambone said.
He said 529 plans have evolved into multimanager products sold through advisers. The three companies already work together in Nevada where Vanguard, which is based in Valley Forge, Pa., started the Vanguard 529 College Savings Plan in December 2001. Last November, Upromise started its Upromise College Fund through Nevada, and in March Columbia Management Group Inc. became Nevada's third plan when it introduced its Columbia 529 Plan.
The new 529 plan in New York is expected to include investment options from both Vanguard and Columbia in addition to Upromise's rebate program that lets families contribute to a 529 account by purchasing groceries, eating in restaurants, or obtaining mortgages. Shoppers can earn 5% back on their purchases of, for example, Coca-Cola, Huggies, Kellogg's cereals, Tide, and Tylenol.
Since its launching in April 2001, Upromise has enrolled 2.5 million families. Vanguard, Columbia, and Salomon Smith Barney are the only 529 plans connected to Upromise's rebate program.
"There is a natural synergy between our firms, and we were able to create a superior bid in terms of features and price that others just couldn't match," Mr. Tambone said.
Jim Fadule, the president of Upromise Investments Inc. in Needham, Mass., said the three companies' reach within New York State helped them be selected. Fleet has one million account holders and 337 branches in the state, he said. Vanguard has 400,000 retirement plans, and Upromise has 300,000 account holders in New York.
"If you look at what we can offer versus what a traditional investment company can offer, typically they are either a retail firm or they work through the adviser channel," Mr. Fadule said, "and typically their interest is in selling proprietary products. We feel like we can do everything."
Jim Tolve, a spokesman for TIAA-CREF, said his company delivered a competitive proposal.
"We would have liked to have won the bid, and we priced a proposal to provide a high level of service and return value to our three million participants around the country, but the state went with Vanguard," he said.
Mr. Tolve said a range of factors had influenced the state's decision.
"We still manage 529 plans in 12 states, and New York and every state is a separate entity," he said. "There are contracts, and contracts do come up. They expire, and it is up to the state and the company to decide how they will proceed."
Jeff Coghan, a 529 plan product manager at AllianceBernstein, said this could be a significant blow to TIAA-CREF.
"Any time you lose your largest state, it is a blow," he said. "TIAA-CREF is a great company. They are a leader in the 529 space. They were there before others got involved, but I don't know how much that means anymore. There is a keen interest in buying these plans through advisers."
In the past year states including Texas, New Jersey, and Virginia have introduced adviser-sold 529 plans, Mr. Coghan said.
Thomas McConnell, a senior vice president at the Delaware Investments unit of Lincoln National Corp., helped develop the New York 529 plan when he worked for TIAA-CREF. He said the company was not shut out of New York because it could not offer an adviser-sold plan. Though TIAA-CREF has built its business on a direct-sold platform, he said, it already offers adviser-sold products in Missouri and Mississippi.
Mr. McConnell said the bigger issue was cost. The winning bid was roughly 20 basis points lower than the 60 basis points TIAA-CREF was charging investors.
"New York is banking on the belief that investors want to select a 529 plan based on cost," Mr. McConnell said. "I haven't seen a lot of price sensitivity among consumers. I find that more of them want more product options. I mean, for some folks, cost is No. 1, but that doesn't describe the majority of the market."
Merrill's Mr. Toth said he expects the assets in TIAA-CREF's New York 529 savings program will remain with the company for a five-year "wind-down" period. Any new assets would go to the new investment managers. Assets in TIAA-CREF's program will maintain their tax benefits and will be converted gradually from TIAA-CREF to the new asset managers.
Mr. McConnell, whose company manages $67 million of 529 plan assets for Pennsylvania and Hawaii, said other states may consider changing providers when contracts come up for renewal.
"I don't think there will be as much movement as the New York situation may indicate," he said. "There are plenty of opportunities for people to get into offering a 529 plan. There are 50 states, and there are probably 70 plans. With that in mind, any firm can get into the business today."
