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N.Y. 529 Switch Signals Gain for Advisor Model

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New York State may have changed the way mutual fund 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 late this summer.

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. But also important, many said, was the fact that the new management group's advisor-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, said and more states are offering a 529 plan that can be sold through advisors because they view it as "a product that is sold and not bought," she said.

Besides offering more distribution points than TIAA-CREF and sales through advisors, the Upromise-Vanguard-Fleet combination is also a multi-product platform.

When New York announced that the state would not renew TIAA-CREF's mandate, it effectively cut the firm's $3.98 billion of assets under management in 13 state plans in half, dethroning it as the nation's biggest 529 fund manager.

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 make competitive bids to become a new program manager," said Charles Toth, chairman of the College Savings Foundation and director of Merrill Lynch's education savings network. "You will see over time that states will select new managers." Since they reap fees for each savings account opened, states are highly motivated to grow their programs, he said.

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. In the same period, Virginia's 529 plan assets grew 34.3%, to $3.4 billion.

New York was not the first state to turn away TIAA-CREF. 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.

Jim Tambone, a co-president of Columbia's Liberty Fund Distributors, said, "We were enthusiastic that an advisor-sold model was the way to win the mandate from New York."

Financial Research said that 68% of 529 plans were sold through intermediaries last year, up from only 20% in the fourth quarter of 2000. "The market has really figured out that the advisor can make a difference in getting the word out about 529 plans," Tambone said.

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. 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.

Jim Fadule, president of Upromise in Needham, Mass., said the three companies' consumer reach helped them be selected. Within New York alone, Fleet has one million account holders and 337 branches, Vanguard has 400,000 retirement plans and Upromise has 300,000 account holders.

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, a leader in the 529 space - but I don't know how much that means anymore. There is a keen interest in buying these plans through advisors." In the past year, states including Texas, New Jersey and Virginia have introduced advisor-sold 529 plans, he noted.

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 advisor-sold plan, as it already offers advisor-sold products in Missouri and Mississippi. McConnell said the bigger issue was cost.

"New York is banking on the belief that investors want to select a 529 plan based on cost," McConnell said. "I haven't seen a lot of price sensitivity among consumers. I find that more of them want more product options.

Nonetheless, Merrill's Toth expects assets in TIAA-CREF's New York 529 savings program to remain with the company for a five-year "wind-down" period.

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