Managers cut fees to retain lucrative college plans

By Ross Kerber BOSTON, Nov 6 (Reuters) - Money management companies, anxious to hang on to lucrative contracts to manage college savings plans, are making concessions to keep the business from slipping away. Seven of eight states that have signed contracts this year have chosen the firms that were already managing these plans -- in many instances, receiving sizable cuts in fees. "There is a lot of money in these plans and companies don't want to lose them, so they're willing to be as aggressive as they need to be," said Andrea Feirstein, a New York consultant to state officials in the $100 billion industry. In all more than $9 billion stayed in the same hands, in a year when expectations for turnover were high given recent market volatility and disappointing returns. Education investment giant TIAA-CREF re-signed deals this year with Vermont, Minnesota and Kentucky. Fidelity Investments scored a renewal with its home state of Massachusetts and picked up Arizona. Upromise Investments, the college-savings unit of SLM Corp, said it recently renewed deals with Nevada and Colorado. But to keep the business, fund firms have launched a price war. In Vermont, TIAA-CREF slashed fees on its popular Managed Allocation option to 53 basis points from 80 basis points. SOUR RETURNS SHARPEN SCRUTINY OF COSTS In some states firms including Fidelity and Upromise have cut fees even when they did not have to, to stay in regulators' good graces and to win more customer accounts. Overall, fund data specialist Morningstar Inc estimates that the so-called 529 plans charge an average of 85 basis points nationally, down from more than 100 basis points as recently as two years ago. In that time complaints over costs have piled up, and on-line comparison shopping has gotten easier for parents. "What pricing looked like eight years ago versus today, a lot has changed," said Peter Angus, senior vice president for Upromise, which cut fees this year in New York, Iowa and elsewhere. The 529 plans are named after the section of the IRS code that created them in 1996. Sponsored by states, they offer federal tax benefits for money set aside to pay for a child's college education. Many plans have come to resemble target-date retirement funds, shifting to more stable investments from more aggressive ones as the beneficiary approaches college age. But as with retirement funds, some 529 plans underperformed even before the stock market slide in 2008, which led to greater scrutiny of the industry. OPPENHEIMER OUT IN OREGON In Oregon, a contract with the Oppenheimer Funds unit of MassMutual Financial to run the state's 529 plan was not renewed, after complaints Oppenheimer misrepresented its strategies as more conservative than they actually were. Oppenheimer has said it provided full information. In its place the state appointed TIAA-CREF, which will trim fees for a number of target-date and more actively managed portfolios, according to state data. The Oregon win and the three renewals mark a comeback for TIAA-CREF, the New York firm best known for running retirement services for academics and healthcare workers. The firm has regrouped after losing a contract to manage California's 529 plan to Fidelity in 2006. "If you're doing your job as a program manager you're taking steps to understand what are the specific objectives of the state sponsors," said Doug Chittenden, the TIAA-CREF executive overseeing its 529 plans. "You gain a lot of trust." As of June TIAA-CREF was only the fifth-largest manager of 529 plans, ranked by assets under management, according to Financial Research Corp. of Boston. TIAA-CREF says it managed $5.5 billion of 529 assets as of Sept. 30, up from $5.1 billion a year earlier. American Funds is the largest manager, chiefly through its services to Virginia's $21.2 billion plan. WINS FOR THE HOME TEAM Consultants say that home-state advantage could also play a role in how states award the 529 contracts. Vanguard, for instance, runs a 529 plan in Pennsylvania, home to its headquarters. Treasury officials there said Vanguard's presence was a bonus but that it won a competitive bid process. Officials this summer renewed Boston-based Fidelity's contract to run Massachusetts' UFund college investing plan. The local presence was not decisive, said Tom Graf, director of the plan's state authority. But he added the local offices were appealing because UFund is sold directly to consumers. "It's an advantage that they have a team on the field," he said. (Editing by Steve Orlofsky) Keywords: SAVINGS/COLLEGE ([e-mail]; [phone]; [e-mail]) COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved.

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