To attract more parents to college-savings plans, states are making a new round of changes to deliver lower-cost, better-performing investments.
In some states, investors are getting new plan managers, new investment options or both. Nevada's Upromise 529 plan this month replaced its investment manager, Vanguard Group, with State Street Global Advisors, and has moved from offering mutual funds and other investments to cheaper exchange-traded funds.
By July, Nebraska will shake up its investment lineup in three of its 529 plans by adding global bond funds, dividend-focused stock funds, ETFs and investments with emerging-markets exposure.
Vanguard still manages a separate Nevada 529 plan, which the firm says offers similar investment choices to what it offered in the Upromise plan.
In other cases, investment firms are opting not to reapply to manage certain 529 plans. Last month, California closed its Fidelity Investments-run 529 adviser-sold plan after the firm decided to leave, and it transferred investors to another state plan managed by TIAA-CREF.
Later this year, Wisconsin's three 529 plans will change managers, following Wells Fargo (WFC)'s
Both Fidelity and Wells Fargo cite a desire to focus on boosting other parts of their business as the reason for leaving the plans. But some experts say renewed pressure on firms to keep lowering their fees might be making it harder to find managers.
Shortage of Bidders
When California's adviser-sold 529 plan went up for bids last year, for example, no investment firm applied. Its direct-sold plan -- one of the largest in the country, with some $4 billion in assets -- received just two bids.
Andrea Feirstein, managing director at AKF Consulting Group, which advises states that administer 529 plans, says the tepid response indicates that investment managers might not be willing to bid on plans where fees are too low.
If the trend continues, fewer firms may be managing 529 plans -- and that could have several implications for investors. An investment manager that runs many state programs will likely offer similar investment options in each of them, so parents who compare 529 plans before choosing one could find less variety between them in the future, says Joe Hurley, founder of Savingforcollege.com, which tracks 529 plans.
Until now, states generally didn't tinker much with their 529 plans. But market volatility last year led to another round of losses in several 529 plan investments -- many stock funds lost 0.3% to 13%, according to Morningstar (MORN)
They're insisting on additional investment options, including fund offerings from several different firms, says Paul Curley, director of college-savings research at Boston-based Financial Research Corp., or FRC. They're also looking for investment managers to agree to lower fees and to spend more to market the 529 plan to large numbers of potential new customers.
States say the moves are part of an attempt to provide more-diversified 529 plans that are less susceptible to market downturns. They say they also hope to assuage participants' concerns while luring new investors.
"We want greater exposure to a wider variety of people who'll bring in more contracts and assets," says Steve George, chief of staff for Nevada's treasurer.
Returns from 529 plans are tax-free as long as they are used to pay for qualified higher-education expenses. Savers typically favor age-based portfolios that invest heavily in stocks when children are young and grow more conservative as they move closer to college age.
Investors deposit approximately two-thirds of new contributions in age-based portfolios, and 529 plans are continuing to add them. They represented 44% of investment options in 529 plans last year, up from 41% in 2010 and 39% in 2009, according to FRC.
But even as age-based portfolios become more popular, 529 plans have been diversifying their investment offerings. To address various degrees of investor appetite, 529 plans have been adding such options as federally insured savings accounts, funds with international exposure and Treasury inflation-protected securities, says Mr. Hurley.
Advisers, however, caution that with more choice comes more risk. "The trend is a double-edged sword," says Deborah Fox, a San Diego-based financial planner and founder of Fox College Funding, since for the average parent, too many choices can lead to more confusion.
Contributions to 529 plans have slowed over the past year. Investors added $18.5 billion to the plans in 2011, about the same as the prior year, according to the latest data from FRC. The amount deposited into new 529 plan accounts fell: In 2011, the average new account totaled $4,565, down 9.3% from 2010.
Experts say fees will likely continue to drop as more plans turn to ETFs and press investment managers to lower charges. Nevada's Upromise plan is the second to offer ETFs almost exclusively, following Arkansas's adviser-sold iShares 529 plan. Arkansas's average fees are about 0.6%, while the average fees in adviser-sold plans are 1.14%, according to the FRC.
Advisers say parents should focus on picking a 529 plan that complements their investment style. With market volatility likely to persist, parents should choose investments for the long haul, especially since they have just one chance per year to make changes.
Risk-averse parents might want to consider a plan that includes a variety of investments that aren't exposed to the stock market, such as FDIC-insured accounts and bonds, though bond funds could take a dive if interest rates rise sharply.