As early as one year ago, State Street
and its 529 arm Schoolhouse Capital
started investigating ways to distribute its New Mexico-sponsored 529 differently. The provider continued to look for ways to make the plan tenable, continuing to look for a workable model into May of 2004.
In May, State Street approached New Mexico about finding a "new model" for the state, said John Whiteside, executive director of the New Mexico Education Trust Board. Schoolhouse then proceeded to negotiate with the state's other 529 providers, including Evergreen Investments, OppenheimerFunds and others, about taking over the plan, said Whiteside. A State Street spokeswoman did not return a call seeking comment.
Those discussions were fruitful, as State Street recently announced
that Evergreen Investments
will share responsibility for the plan. The New Mexico Education Trust Board made the decision to transition to Evergreen and OppenheimerFunds in a public meeting on November 30.The two providers will take over the management and distribution of the plan effective January 31, 2005. Evergreen and OppenheimerFunds will continue Schoolhouse's 10 year contract, which is halfway over, said Whiteside.
In a letter
to the plan's participants, Letitia Chambers, director of the New Mexico Education Trust Board,
said the decision was the "result of the Board and Schoolhouse Capital mutually agreeing to transition
the program management role to Schoolhouse Capital’s current partners, Evergreen Investments
and OppenheimerFunds. Evergreen will have primary responsibility for the management of the
While Evergreen and OppenheimerFunds may still find 529s a fruitful opportunity, State Street apparently does not. The industry behemoth reemphasized its decision to exit the once promising business entirely in a release, citing lack of scale: "Our decision to exit the 529 program management business reflects our focus on supporting and growing business areas where we receive the greatest efficiency and can capitalize on scale," stated Alan Greene
, executive vice president of State Street.
, State Street's chairman and chief executive officer, added more context
, indicating that the resources could be better used elsewhere: "We are taking steps to align expenses with revenues, not as a reaction to this quarter’s results, but as a conscious effort we began early in July. These changes will not only help us better absorb shifts in market-driven revenue, but more importantly, strategically allocate our resources," he stated.
The decision doesn't appear to have been demand-driven, either. Whiteside commented that while the plan's participants did not complain about the plan's fees, "everyone was looking for a lower cost option."
"The overall goal was to make the process more affordable, both for clients and for the distributors. And obviously, when there's a significant recordkeeping process that's involved in these types of plans, if you have 40 different mutual funds, it's considerably more expensive to recordkeep…than it is for a reduced number," said Whiteside.
New Mexico's five plans, three advisor-sold and two direct-sold, have approximately $1.75 billion in assets, with $35 million in in-state, direct-sold assets; $170 million in national, direct-sold assets, and the bulk in national, advisor-sold assets, said Whiteside.
Far from being the profit centers that some providers thought they would be, the plans are growing increasingly problematic, as both the SEC
and the NASD
investigations into plan sales practices and fees, among other things. Senator Peter Fitzgerald (R, Illinois) chaired a subcommittee hearing on the plans in September, arguing that the plans are "more problematic" than mutual funds.
But if State Street can't pull it off, what makes other providers think they can?
While an OppenheimerFunds spokesperson did not return a call seeking comment, Evergreen's Rich Gersen
, head of business strategy, said that 529s are a "great product" for the firm. "[It] meets a very definite need out there," said Gersen.
Providers may see relief soon, as states try to respond to the developments in the industry. "States are looking very closely into what their practices are…they've developed some disclosure statements, pretty much uniformly adopted by the industry as understandable," said Whiteside.
Whiteside hypothesized that there will be consolidation in the business: "I think it's going to happen some, but I don't think it's going to be a wholesale change…the industry…will keep looking for efficiencies."
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