At a time when some state municipalities are adding new 529 plan options for investors, the Department of Higher Education of New Mexico has done just the opposite.

New Mexico has merged its two parallel advisor-sold 529 plans, thereby reducing expenses and paring back investment options. The plans were officially merged on July 11.

The revised and nationally available CollegeSense 529 college savings plan, which is offered through the State of New Mexico, now sports Evergreen Investments of Boston as its program manager; a change that was originally made this past January. But the fused plan includes mutual fund offerings from both Evergreen and MainStay Investments, the asset management arm of New York Life Investment Management. In addition, firms and financial advisers will now distribute the new New Mexico plan.

School's Out

Previously, both Evergreen and MainStay had been the state's investment partners, but they operated for two separate 529 plans distributed through financial advisers and the original program manager, Schoolhouse Capital.

Schoolhouse Capital, a now-defunct unit of State Street Corp. of Boston, had been created to exclusively provide management and recordkeeping services to the 529 plan market. But last October, due to a lack of scale and name recognition, as well as paltry revenues, State Street dropped out of the 529 plan market (see MME 11/29/04).

Schoolhouse Capital's exit, the first of its kind among 529 program managers, caused New Mexico officials to reconsider the structure of its plans.

"When we started looking at the organization and structure [of the dual Evergreen and MainStay plans] we realized that it didn't make much sense," said John Whiteside, consultant to the Department of Higher Education of New Mexico. Through discussions with both investment firms, the state decided to merge the Evergreen plan, originally branded the "Arrive 529 Savings Plan", with the New York Life "CollegeSense" plan and retain the better-resonating CollegeSense brand name, Whiteside added. The combined plan now sports more than $600 million among more than 100,000 investors.

Land Grab

"The first years of 529 plans were a land grab," said Burt Baker, founder and managing partner of, a 529 plan information and plan rating Web site.

Now, after the land grab, at a time when investment management companies are reevaluating how the nation's 529 map all shook out, they are stepping even further back and rethinking whether they want to be in the 529 plan market in the first place, Baker noted. Most mutual fund companies are planning their college savings businesses much more strategically and realizing that they need to get to critical mass, he said.

Although strategic planning has certainly increased, so have the number of choices made available under many states' plans. Unlike New Mexico's 529 plan contraction, state legislatures have largely been expanding college savings plan offerings to cater to specific niches of investors, and offer a broader array of choices.

This past November, West Virginia added a fifth 529 plan to its college savings lineup when it hired Dimensional Fund Advisors of Santa Monica, Calif., to run a low-cost, direct-to-investors program utilizing DFA's no-load, 12b-1-free mutual funds (see MME 12/06/04).

This past June, Arizona added its fifth 529 plan program managed by Fidelity Investments of Boston.

While Arizona originally began with two plans, it has since expanded to offer greater choice among advisor-sold and direct-sold plans, as well as actively and passively managed options, said Dr. April Osborn, executive director of the Arizona Commission for Postsecondary Education, which administers the plans' collective $280 million.

Expansion - not contraction - has been the trend nationwide, Osborn contended. "We are seeing states adding options." But, she noted, fees are under greater scrutiny.

New Mexico's Recipe

As part of the New Mexico restructuring, underlying fund offerings are being pared back and cost reductions will be made, Whiteside said.

"Offerings were pared, yes, but not to the detriment of investors," he added. "Operating nearly two dozen programs is much more expensive than operating nearly 15."

Previously, Schoolhouse Capital had dictated the plans' investment models and offerings, explained Jill Silver, vice president and 529 product manager with Evergreen. But when Evergreen stepped up to assume the role of program manager, the decision was collaboratively made to thin offerings.

"We looked at flows, especially into aged-based options and what advisers wanted. We looked at how to make offerings more targeted to time horizons, then scaled back individual options," Silver added.

The combined plan now includes 13 options, including aged-based portfolios, static portfolios and individual fund options. Evergreen took the haircut by withdrawing some of its funds, while MainStay added two new fund offerings. The new plan also includes one extra stable value fund, which will still be available through year end, but only to original MainStay customers.

"We had a good relationship with Evergreen, and knew that if we combined forces, we would have a great multi-managed product," said Steve Fisher, chief marketing officer of New York Life Investment Management and senior managing director, retail investments.

Cream of the Low-Cost Crop

"We're offering a program with the best of the best from each of us." New York Life's original 529 plan had $200 million in assets, while Evergreen's had more than double that with over $400 million, he noted.

In order to cut costs and make the plan more marketable, Evergreen agreed to reduce its administrative fee by five basis points, and chose to include only institutional share classes from both groups in the mix.

"Fees were definitely a focus," Silver admitted. "We are sensitive to offering a product with lower fees."

This isn't the only 529 plan restructuring in New Mexico. In January 2005, OppenheimerFunds of New York, became the program manager and distributor for a direct-sold, multi-manager plan, dubbed The Education Plan, that is marketed to residents of New Mexico and includes some OppenheimerFunds among its offerings. It was also given the green light to convert a small plan that New Mexico had proprietarily managed into OppenheimerFunds' nationally available and adviser-sold ScholarsEdge Plan. ScholarsEdge includes only OppenheimerFunds mutual funds. OppenheimerFunds had served as the distributor of Schoolhouse Capital's 529 plan products since 2001.

(c) 2005 Money Management Executive and SourceMedia, Inc. All Rights Reserved.

Subscribe Now

Access to premium content including in-depth coverage of mutual funds, hedge funds, 401(K)s, 529 plans, and more.

3-Week Free Trial

Insight and analysis into the management, marketing, operations and technology of the asset management industry.