As the competition in the college savings plan market mounts, funds are pulling out all stops including, in one case, corporate espionage, to win new investors, according to a lawsuit filed Oct. 20 against Fidelity Investments of Boston.
Fidelity stole the trade secrets for a marketing program that was initially proposed to it in 1998 by Savor Incorporated, a marketing firm in Plymouth, Mich., according to the lawsuit. Fidelity then gave Savor's plan to Upromise, another marketing firm in Brookline, Mass., according to the suit.
Savor developed a program that would allow consumers of certain products and services to receive a rebate that would be directed toward a designated beneficiary in a 529 college savings plan, according to the complaint.
Dennis A. Doyle, Savor's CEO, approached Abram Claude, a vice president at Fidelity, in September 1998 with Savor's marketing program. After sharing the program's business plan and trade secrets, Doyle was told Fidelity was not interested, according to the complaint.
Fidelity has since formed a partnership with Upromise, according to the complaint.
"Upon information and belief defendant, Upromise, learned about the Savor program through defendant Fidelity, and conspired with it in the misappropriation of plaintiff's trade secrets," the complaint states.
Fidelity has done nothing wrong and has not signed a contract for a 529 marketing program with Upromise, according to Jessica Catino, a spokesperson for Fidelity.
"We're confident we've done nothing inappropriate or actionable by simply considering a business proposal brought to us by Upromise," Catino said in a statement.
Fidelity's denial is unbelievable, Doyle said.
"I can't believe a company like Fidelity would have a spokesperson say 'All we're doing is looking at a business plan,' when Upromise has been saying for six months that they have partnered with Fidelity," Doyle said. "They have definitely signed something with Upromise."
Savor is seeking an unspecified amount in damages, according to the complaint.
The lawsuit underscores the increased competition among fund firms for investors in the college savings plan market. Most states have already awarded contracts for their 529 college savings plans, and fund companies that have won contracts are now focusing their efforts on attracting assets to their programs, executives said.
In the past few months TIAA-CREF of New York, Fidelity of Boston, American Century of Kansas City, Mo. and SSB Citi Asset Management of New York have initiated television or print advertising campaigns promoting their 529 college savings plans.
Alliance Capital of New York won a contract with Rhode Island in September because the proposal it submitted included an aggressive marketing campaign, said John Carl, the managing director of the firm's retirement plans and product manager for the firm's 529 program. The firm is dedicating $5 million of its $12 million advertising budget to market the firm's 529 college plan which the firm calls the CollegeBoundfund, he said. Television commercials will begin airing Nov. 6 in Rhode Island and will then air nationwide, he said.
The firm won a 10-year contract with Rhode Island because it agreed to heavily market the program and the firm has a strong distribution network already established through wirehouses, regional broker-dealers, banks and financial planning firms, Carl said.
"Alliance has national leverage across multiple levels of distribution, so that was one of the big appeals," he said. Alliance's experience running institutional money for retirement programs was another factor that weighed heavily in the firm's favor, he said.
Unlike other companies that have contracts with several states, Alliance has only one contract that with Rhode Island, he said. Rhode Island's laws allow Alliance to offer one of the most flexible programs in the industry, something Alliance plans to market heavily, Carl said. The state, for example, has the highest contribution limits of any state, he said.
Mercury Funds, a unit of Merrill Lynch Investment Managers of New York, is taking a completely different approach to marketing its 529 program, said Mark D. Cone, managing director for Mercury Funds. The firm has contracts with Arkansas and Wyoming. It is focusing all of its marketing efforts on the intermediaries who sell the program rather than launching a multi-million dollar campaign aimed at retail customers, he said.
"We think it's a product that needs to be explained and it's a good fit for the advisor and their clients," he said. One of the major reasons that intermediaries want to sell college savings plans is that they do not compete with other products and they bring in new business, Cone said.
The firm is also selling through certified public accountants, who, it feels, have the greatest potential for success selling 529 programs, Cone said. Certified public accountants traditionally help families with estate planning and the plans can be used effectively in minimizing estate taxes, he said.
TIAA-CREF is one of the leaders in the 529 college savings plan market. The firm currently offers programs in eleven states including New York, California, Vermont, Michigan, Kentucky, Missouri, Minnesota, Tennessee, Oklahoma, Connecticut and Idaho, said Tim Lane, president of TIAA CREF tuition financing. The firm manages about $725 million in assets held in the plans. The firm launched its New York program in 1998; the rest began this past year, he said.
The firm is designing its marketing efforts to appeal to the residents of each state, Lane said. Even though investors can invest in any state's program, each program will include the state's name, Lane said.
TIAA-CREF also plans to emphasize in its marketing materials the fact that state residents who invest in their state's plan can deduct state taxes from their investments, he said.
That concentrated marketing approach and the firm's low fees, which are normally below 100 basis points, are what helped the firm win most of its contracts, Lane said.