Saturday, June 11, 2011


Fidelity Investments will no longer manage California's 529 college savings plan, which will get new investment options and a new administrator.

By Walter Hamilton, Los Angeles Times |

from the SEC:

What is a 529 plan?

A 529 plan is a tax-advantaged savings plan designed to encourage saving for future college costs. 529 plans, legally known as “qualified tuition plans,” are sponsored by states, state agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue Code.

June 11, 2011 - California's 529 college-savings plan is about to get a major overhaul.

Fidelity Investments, the mutual fund giant that has administered the plan since 2006, has dropped out of the running to keep managing it, and a state board will meet Monday to pick a new firm.

The changeover will lead to a complete revamping of the plan, including a new slate of investment options.

A number of states have changed 529 providers in recent years in response to criticism that their plans were weighed down by excessive costs and weak investments.

The state board responsible for California's ScholarShare plan sought bids from outside providers in March. Fidelity, which manages 529 plans in four other states, did not bid.

"Fidelity made a strategic business decision not to bid," said Vin Loporchio, a company spokesman. "We just made a decision that our best strategy is to focus our efforts in California" on other business lines such as running 401(k) retirement plans.

A 529 plan is a state-sponsored program in which college savers invest in a variety of options, including stock, bond and money-market mutual funds. Gains are not subject to federal taxes or, in many cases, state taxes, as long as the money is used for specific college expenses, such as room and board.

Fidelity's initial four-year contract to run California's plan expired last year, and it has been operating under a one-year extension.

A spokesman for state Treasurer Bill Lockyer, who chairs the 529 board, would not disclose which firms are seeking to succeed Fidelity.

"Fidelity made their decision. The board will make its decision on Monday," said Tom Dresslar, the spokesman. "We're going to move forward and make ScholarShare a better plan."

Investors in 529 changeovers typically are automatically transferred into funds with similar investment styles to their previous funds.

California's 529 is considered middle-of-the-pack in terms of investment returns and expenses. Research firm Morningstar Inc. rated it "average" in a comparison of 82 plans in November.

"The Fidelity plan is plain vanilla," said Laura Lutton, a Morningstar analyst. "You can get a perfectly nice 529 lineup, priced fairly. But it's not exceptional."

Fidelity said its plan was better than that.

"We feel we have a very strong 529 business and a very strong offering in everything from performance to service to innovation and fees," Loporchio said.

Unlike some other providers, Fidelity offers only its own funds for 529 investments. Critics said that excludes top-performing offerings from other fund managers.

To encourage participation in 529 plans, many states give tax breaks for initial contributions. California does not offer such tax deductions, and it probably would stay that way in the new plan.

There are 9.6 million 529 accounts nationwide, holding $146 billion, according to Financial Research Corp. in Boston.

California's ScholarShare plan had almost 282,000 accounts and $4.1 billion in assets at year-end, according to the state.

Worried about steadily rising college costs, U.S. families contributed a net $9 billion into 529 plans last year, up from $5.1 billion in 2008, according to Financial Research. The annual peak was $13.9 billion in 2006.

The cost of tuition, room and board at private four-year colleges averages $37,000 a year and tops $50,000 at some elite schools, according to the College Board. For students attending public universities in their home states, the average bill has surged to more than $16,000.

Students who graduated in 2009 had an average of $24,000 in student loans, according to the Project on Student Debt. In California, the average was $17,326, with 48% of students having some debt.

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