PROVIDENCE, R.I. (WPRI) – General Treasurer Seth Magaziner is inching toward a decision that will affect more than $7 billion in state-controlled funds and impact the cost of college for thousands of Rhode Islanders.
Magaziner’s office is in the process of deciding whether to hire a new outside manager for Rhode Island’s 529 college savings plan, the CollegeBoundfund, which has grown into one of the largest such programs in the country but has also come under criticism for its fees and performance.
The Rhode Island plan has been run by the same company, AllianceBernstein, since 2000, but its current management contract expires next June. The treasurer’s office solicited bids in July for a new contract, and has said it expects to make a final decision this month or next month.
AllianceBernstein is bidding to keep the contract, a spokesman told WPRI.com. The treasurer’s office declined to disclose how many other companies responded by the Aug. 5 deadline to submit proposals.
The bidding process “is obviously big news,” Paul Curley, director of college savings research at Strategic Insight in Boston, told WPRI.com. “It’s a larger plan that’s been in the industry a long time. It has a lot of experience both in-state and across the nation. There will be a lot of interest both for Rhode Island residents but also for the industry as a whole.”
Congress created the tax-advantaged 529 plans, named for the section of the IRS code that regulates them, to help families save money to pay for college. Each state can set up a 529 program and market it across the country, which has led to competition for accounts nationwide.
Rhode Island’s CollegeBoundfund plan has grown enormously since AllianceBernstein took charge of it 15 years ago. The plan had $7.4 billion in assets as of June 30, making it the seventh-largest 529 plan in the country, according to data compiled by Strategic Insight. To put that number in perspective, it’s almost as much money as is in the state pension fund ($8 billion).
Only a tiny portion of those assets – about $350 million – belonged to Rhode Islanders, with the rest held by out-of-state residents. Californians, for example, have socked away nearly $1 billion through Rhode Island’s 529 plan.
Those out-of-state accounts have proved to be extremely lucrative for Rhode Island.
Under the current contract with AllianceBernstein, the state collects fees based on the number of out-of-state CollegeBoundfund account holders, with most of the money earmarked for college scholarships in Rhode Island. AllianceBernstein transferred the state more than $8 million from such fees in 2014, and the total transfer over the last 10 years amounted to more than $53 million. State residents also pay lower fees.
One of the reasons that tiny Rhode Island’s 529 plan has accumulated such a large national asset base – which is what generates those millions in fees – is thanks to a first-mover advantage, according to Curley. “It was one of the first plans ever created nationally,” he said.
AllianceBernstein’s management of the CollegeBoundfund has come under repeated criticism, however.
The research firm Morningstar gave Rhode Island’s 529 plan a negative rating for four straight years between 2010 and 2013, though defenders of the plan emphasized that the analysis was focused on out-of-state account holders, not Rhode Islanders. The firm stopped ranking Rhode Island in 2014 when AllianceBernstein hired it to craft a new investment option for the plan.
Another research organization, SavingForCollege.com, recently ranked the Rhode Island 529 plan’s investment performance as one of the weakest in the country over the last one, three, five and 10 years.
“The rankings pretty much speak for themselves,” Joseph Hurley, SavingForCollege.com’s founder, told WPRI.com.
The CollegeBoundfund also appears to be having trouble attracting new investors from outside Rhode Island as the number of 529 plan options grows.
The number of out-of-state CollegeBoundfund accounts declined from 477,143 in 2010 to 373,595 as of June, a 22% drop in five years, data from the treasurer’s office shows. The number of Rhode Island accounts rose from 23,396 to 25,813 over the same period, while total assets in the plan were close to flat.
Jonathan Freedman, a spokesman for AllianceBernstein, told WPRI.com the decline in out-of-state accounts is “not surprising” in light of a wider industry trend away from plans sold by financial advisors – which is how AllianceBernstein markets the Rhode Island plan out of state – and toward plans sold directly to consumers.
Rhode Island’s CollegeBoundfund was also the only large 529 plan in the country that lost assets during the first half of 2015, according to data compiled by Strategic Insight. Curley said that fact is “not necessarily a red flag,” however, because the plan’s age means more of its longstanding accounts are starting to make withdrawals to pay for college.
Freedman strongly defended AllianceBernstein’s overall management of the CollegeBoundfund as it fights to convince Magaziner and his team to let the firm keep the the contract.
AllianceBernstein is “very proud that through our longstanding relationship with Rhode Island, roughly $5 billion has been utilized for college expenses for nearly 300,000 beneficiaries nationwide,” Freedman said. “We are deeply committed to offering a plan that encourages and enables families the opportunity to pursue higher education.”
Magaziner’s predecessor as treasurer, now-Gov. Gina Raimondo, ordered a review of the CollegeBoundfund’s performance when she took office in 2011 that led to a series of changes, including the addition of the Morningstar index portfolio and various fee reductions for Rhode Island residents.
“We strongly feel the program changes made have enabled us to offer one of the most comprehensive college savings plans in the country and we hope to continue our relationship with Rhode Island,” Freedman said.
The treasurer’s office said the proposals submitted for the CollegeBoundfund contract are being reviewed and graded by Andrew Roos, Magaziner’s outgoing chief of staff; Anne-Marie Fink, the state’s chief investment officer; and Faith LaSalle, an attorney who serves on the State Investment Commission and was formerly chair of the board at the R.I. Higher Education Assistance Authority, a now-defunct quasi-public agency that oversaw the CollegeBoundfund before it was dissolved this year.
“We have begun the process of reviewing the proposals, but cannot comment on them at this stage,” Roos told WPRI.com. “We hope to have the process completed to present a recommendation to the State Investment Commission for the October meeting.”
Roos said the identities of all the firms that bid for the CollegeBoundfund contract will be revealed once a decision has been made, as part of a transparency policy instituted by Magaziner.
If the CollegeBoundfund manager switches from AllianceBernstein to a different firm, the tens of thousands of accounts and billions of assets currently in the plan will move, too.
“Any plan that you might get into could change in the future depending on what the state does and depending on what the program manager does,” SavingForCollege.com’s Hurley said. “It’s one of the things with the 529 plans, that you don’t have the control over it that you do with some other types of broker accounts or investment accounts.”Top 5 Rhode Island Zip Codes for CollegeBoundfund (by assets)
• 02806 (Barrington): $33.3 million
• 02906 (Providence): $28.5 million
• 02818 (East Greenwich): $25.2 million
• 02852 (North Kingstown): $16.4 million