California’s 529 college-saving plan to gain options under TIAA-CREF


Families investing in California’s college-saving plan soon may have lower average fees and a new lineup of fund options.

The state board that oversees the ScholarShare program selected investment giant TIAA-CREF, a big manager of retirement accounts for teachers and others working in education, to manage the so-called 529 plan.

The New York firm would replace Boston-based Fidelity Investments. Fidelity did not submit a bid to continue running ScholarShare, which has assets totaling $4.4 billion across 291,000 accounts. Its contract expires in November.


A 529 plan allows college savers to invest in a variety of options, including stock, bond and money-market mutual funds. Gains are not subject to federal tax as long as the money is used for college expenses such as tuition, room and board. Gains in the ScholarShare plan are similarly exempt from California’s income tax.

TIAA-CREF’s proposal to run ScholarShare calls for lower overall fees compared with those incurred under the current Fidelity-run plan, according to a report prepared by the ScholarShare board’s staff.

But the office of state Treasurer Bill Lockyer, who is chairman of the board and released the report Monday along with the announcement of TIAA-CREF’s selection, didn’t quantify the difference in fees that investors could expect.

In addition to lower fees, a plan run by TIAA-CREF would include fund options managed by T. Rowe Price, Pimco and Dimensional Fund Advisors as well as by TIAA-CREF, the staff report says.

The current Fidelity-run plan offers only Fidelity-managed funds. Critics say that prevents investors from gaining access to top-performing funds managed by other firms.

The prospect of lower fees is good news, said Laura Lutton, a 529-plan expert at mutual-fund research firm Morningstar Inc.


“The lower the fee, the more likely your investment is to outperform over the long-term,” she said. “Just based on the lower cost alone, I have more conviction in the plan.”

TIAA-CREF, however, is not a star among fund management firms, Lutton said.

“Of the funds our analysts like best, I don’t think any of them are from TIAA-CREF,” she said. “It’s not a firm that has best-in-class offerings, but they have a lot of very adequate offerings.”

T. Rowe Price, Pimco and Dimensional Fund are well-regarded, she said.

A Lockyer spokesman said he did not know how many funds would be included in the new plan.

Managing ScholarShare would be a repeat performance for TIAA-CREF, which ran the program from its inception in 1999 until 2006, when Fidelity took over.

A number of states have changed 529-plan providers in recent years in response to criticism of their fees and investment performance. In November, Morningstar rated California’s Fidelity-run plan “average.”

The state received only two bids to manage ScholarShare. The losing bid, submitted by Union Bank & Trust Co. in Lincoln, Neb., included funds from Vanguard, Fidelity, T. Rowe Price, Pimco and Dodge & Cox. Its overall fees also would have been lower than the Fidelity plan’s, the state board’s staff said. The firm also offered to change its lineup of funds based on their returns.


But the TIAA-CREF plan scored higher on a ranking system used by the state, according to the staff report, which didn’t identify the ranking system’s criteria.

The state received no bids for its so-called advisor program, a much smaller 529 plan in which financial advisors invest on behalf of clients. The state will consider several options for the advisor program, including approaching TIAA-CREF about managing that program.

Investors in 529 plans whose managers are replaced typically are automatically transferred into funds that have similar investment styles to their previous funds.