Managers of 529 college-savings plans have always competed on fees, but the latest round of the bidding war promises to be the most intense.

To attract and retain state contracts, wealth management companies – particularly Fidelity Investments and its primary rivals, Vanguard Group and TIAA-CREF – have been lowering fees on the plans basically since their invention. Fidelity fired the latest salvo on Tuesday, slashing its program management fees by a third to a half for its five state-sponsored 529 plans, including both its direct-sold and adviser-sold plans.

In devising the cuts, observers say, Fidelity had the industry's top prize in mind: the New York contract, the largest direct-sold 529 plan in the country, now run by Vanguard but seemingly up for grabs. The New York 529 plan can be rebid in September 2010, and all the companies that administer 529 plans are eyeing it.

"Fidelity didn't just lower its fees out of the goodness of its heart," said Andrea Feirstein of AKF Consulting Group. "I think there are two things going on: Fidelity is trying to encourage people to save money for college, since 529 college plans were an industry that the financial market meltdown of 2008 really hurt. By cutting fees across all their plans, Fidelity is also sending a message to their competitors that they are in this space to stay and they are not going to lose any market share."

While noting that "the only state coming up for bid is New York," Jeff Troutman, Fidelity's vice president for college planning, said that although the company is "not specifically looking at New York … over the course of the last 18 months or so, as states have launched RFPs, fees are certainly front and center."

For its direct-sold plans in New Hampshire, California, Massachusetts, Delaware and Arizona, Fidelity cut program-management fees in half, or 15 basis points, for its index portfolios, and a third, or 10 basis points, across its actively managed portfolios. Index-portfolio fees now range from 0.25% to 0.35% of plan assets. Actively managed portfolio fees now range from 0.59% to 1.04% of plan assets. In total, the Boston company has $14.3 billion of 529 plan assets under management.

Vanguard Group, which manages and administers plans for Nevada, New York, Iowa, Missouri, Colorado and Pennsylvania, had nearly $25 billion of 529 plan assets of nearly $25 billion through Sept. 30. The Malvern, Pa., company has already lowered expenses this year for four state 529 plans, in addition to the Arkansas plan, which features Vanguard investment products.

Jennifer Compton, a spokeswoman for TIAA-CREF, with 529 assets of $5.4 billion, said the company has cut fees significantly this year in Vermont, Minnesota and Kentucky.

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