Mellon Financial Corp. felt some backlash from its home state’s government for getting out of consumer banking when the it was passed over for a contract to run Pennsylvania’s tax-free college investment plan.

State Treasurer Barbara Hafer announced Monday that Philadelphia’s Delaware Investments, which manages $84 billion of assets, had been selected to run the state’s 529 college savings plan. Hafer said the state had planned to use Pittsburgh-based Mellon and its Dreyfus mutual funds but that after Mellon sold its consumer banking business to Citizens Financial Corp. in July she decided to seek a new proposal.

Hafer said in a press release that the decision to seek new proposals was right for the state and should produce "a program that is even better."

Bob Gentzel, a spokesman for the Pennsylvania Office of Treasury, said the state was interested in finding a company with a Pennsylvania retail presence. "Delaware Investments had that presence, and Mellon no longer did, and that weighed in Delaware’s favor," Gentzel said.

In a statement released Monday, Mellon said it was disappointed not to be chosen to develop the plan. It said it will continue to supply financial services to the state, including being custodian for $85 billion of retirement funds.

Michael Mayo, a banking analyst at Prudential Securities in New York, said that Mellon’s executives knew they might face community backlash, to the point where Martin McGuinn, Mellon’s chairman and CEO, tried to accomplish some early damage control.

McGuinn declined to participate in a summertime call with investors and analysts discussing the deal and instead spent his time talking with community members, Mayo said.

"This is some of the baggage that comes with a change in strategy," Mayo said. "When Mellon comes out on the other side, they will be a more focused firm. This is part of what they anticipated."

A spokesman for Mellon said Tuesday, "We did not anticipate that the business would be rebid."

McGuinn, in a Jan. 1 letter to Mellon employees, said the Citizens deal had accelerated "our evolution from a traditional bank with businesses managed for both growth and return to a global financial services company whose businesses are all managed for growth."

Denis LaPlante, an analyst at Fox-Pitt, Kelton Inc., said any time a municipality or state feels it is being abandoned it tends to take this as an affront.

"Right now, [529 college savings plans] are a small piece of business," LaPlante said. "In the long run, I am sure it would have been a nice piece of business, but when you have $550 billion in assets under management and other custodial relationships with the state, this is chump change."

But 529 college savings analysts are confident that the investment vehicle is about to explode in asset volume. A change in tax law made the plans tax-free, beginning Jan. 1, and analysts said they would total in the trillions of dollars within five years as 529 plans become as commonplace as 401(k)’s.

Unlike 401(k) plans, 529 plans are limited from the provider standpoint because each state can pick only one financial institution to run its program.

"This is a unique product because of how exclusive a club it is," said Burton Greenwald, a Philadelphia-based analyst. "Administering a state plan, especially in a well-populated state like Pennsylvania, is special."

The new Pennsylvania 529 plan is to be offered in addition to the state’s guaranteed college savings plan, which has 60,000 participants with $233 million of assets under management. The new plan, which will be available to investors beginning this spring, will offer "age-based" investment choices to investors. These choices become more conservative as a child nears college age.

Mellon said it would continue to participate in college savings. Its Dreyfus subsidiary is in talks with other states about developing 529 programs.

LaPlante said Mellon would have liked to gain a better foothold in college savings but is not about to change its strategy.

"You always want to win every piece of business you bid for, but the reality is you cannot," LaPlante said. "Mellon had a difficult choice to make. They will lose some business, but in the long run they will be fine."

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