Some banks are adjusting their 529 college savings plans to keep pace as competitors continue to respond to pressure to reduce fees.
Wells Fargo Fund Management has cut its fees twice since becoming the manager of Wisconsin's 529 program at the end of 2004 and says it plans to reduce fees again in January. Wachovia Corp.'s Evergreen Investments plans to add funds to its plan in December. And in the past two weeks, Fidelity Investments, Vanguard Group, and American Century have reduced their fees significantly.
Industry observers said the increased competition over fees might increase the pace of consolidation and drive some companies out of the business.
"As time goes on, different participants are going to make a business decision about the viability of this product remaining profitable," said Diana Cantor, the executive director of the Virginia College Savings Plan and chairwoman of the College Savings Plan Network. "Each company will have to make their own analysis as to how important this is to their overall business."
Joe Hurley, the president of Savingforcollege.com, said providers have been reducing fees associated with their 529 plans for the past couple of years to gain a competitive edge and the pace seems to be accelerating.
"When the fees are reduced in one state, there is a desire on the part of another state using similar mutual funds to drop their fees in order to be competitive," he said. "We have seen a great deal of consolidation in the last few years. I don't know if it can go that much further. This market will be less competitive if there are only a few players that all have the same products."
Analysts said the repeal this year of a "sunset" provision that would have ended the tax break for spending from 529 account balances should mean strong inflows for the product. They expect assets in 529 plans - which stood at $75 billion at March 31, according to Financial Research Corp. - to triple within five to 10 years.
Companies like Fidelity and Vanguard are using index products and lower fees to win state mandates when management contracts come up for renewal. Mr. Hurley said Fidelity's program in Iowa had the lowest fees for most of this year, which "really helped Iowa gather scale."
"Price is an extremely visible factor when people are comparing different 529 plans and deciding which program is right for them," he said. "Vanguard and Fidelity have put themselves in position to gather scale by lowering fees, and every provider is now considering how they can compete."
In the past two years, 12 states have changed providers, including two in the past month. On Monday, the Pennsylvania state treasurer's office selected Vanguard Group and Upromise Investments Inc. to succeed the Delaware Investments unit of Lincoln Financial Group as the investment manager and distributor of its 529 Direct Investment Plan.
The program is to offer no annual account fee, and all its investment options - except the socially responsible portfolio - will have a 0.7% management fee. The socially responsible portfolio's management fee will be 0.75%.
Fidelity, which had $8.68 billion in 529 plan assets under management at Sept. 30, according to Morningstar Inc., proposed a fee structure that was 50% less than what it charged on 529 plans it managed for other states to win the management of California's 529 plan in October. Last week, it reduced the fees on its 529 plans in New Hampshire, Massachusetts, Delaware, and Arizona.
Fidelity is readying age-based index portfolios with fees capped at 0.5% in order to supply a cheaper alternative to plans using actively managed funds. Fidelity dropped its $20 annual fee on all direct-sold plans and is cutting the minimum monthly contribution to $15 from $50.
Vanguard, which had $7.57 billion in 529 plan assets under management at Sept. 30, according to Morningstar, reduced its Nevada program's fees in October.
Jeff Troutman, a vice president of program management for Fidelity's 529 program, said that adding index-based investment options lets Fidelity offer "one of the lowest - if not the lowest - prices in the industry."
"Our pricing structure puts us in a competitive position to gather assets," he said.
Other companies, including American Century and Wells Fargo, are cutting fees in order to keep their state mandates.
Kansas retained American Century as its 529 program manager through June 2012 after the Kansas City, Mo., investment manager expanded investment options and reduced fees from 0.39% to 0.2%. Morningstar says American Century had $1.41 billion of 529 plan assets under management at Sept. 30.
Sara M. Henriksen, a vice president of retirement and education planning at Wells Fargo, said the company has gone through two rounds of fee reductions since taking over Wisconsin's 529 program at the end of 2004 and plans further cuts in January.
The fees in Wisconsin's EdVest program will be reduced from 4 to 6 basis points, she said, depending on the portfolio. Tomorrow's Scholar fees will be cut by up to 11 basis points.
A "competitive bidding process" with other large providers forced Wells to reduce its fees, she said.
"In order to remain competitive, we have to constantly be fine-tuning, and that resulted in fee reductions," Ms. Henriksen said. Wells is the 11th-largest 529 plan manager with $1.77 billion in assets under management at Sept. 30, according to Morningstar.
Dan Flaherty, a spokesman for Wachovia's Evergreen Investments asset management unit, which manages New Mexico's program with New York Life Investment Management, said the company has no current plan to cut fees but will add investment options this month. Evergreen had $727.5 million in 529 plan assets under management at Sept. 30, according to Morningstar.
Ms. Cantor said Virginia, which reduced its fees last year by 60 basis points, to 56 basis points, uses active investment management rather than index funds to stand out among 529 program managers. Fee reduction is "simply the logical next step" as 529 programs continue to evolve, she said.
"As the product grows, we are reaching certain economies of scale, and managers are reaching a level where they can pass along savings to investors," she said. "Program managers and financial services firms have aggregated enough assets where now they are in a position to reduce fees."
Stacey Belford, the 529 plan business manager at American Century, agreed.
"When the 529 plans were launched in the late 1990s, no one knew what to expect," she said. "Plans were difficult and costly to run, and the fees reflected that. There were huge start-up costs. Over time, we started to understand the space, and fees can now be reduced."
Investors do not necessarily just hunt for the cheapest plan, Ms. Belford said. "We want to offer an array of options so investors can choose what is best for them," she said.
Mr. Hurley said several states' programs, including Michigan's, are out for bid, and he expects price will continue to play an important role, as it did in Pennsylvania and California.
"States are certainly putting fees right at the top of the list in terms of what they are considering when choosing a firm as an investment manager," he said.
