Bundled providers such as Fidelity Investments and the Teachers Insurance & Annuity Association-College Retirement Equities Fund are cashing in on the management of tuition prepayment programs, where separate account managers previously reigned supreme.
Tuition Plan Inc., the first nationwide tuition prepayment program for private colleges and universities, and New York State's College Choice Tuition Savings Program both have hired TIAA-CREF as their sole money manager. Fidelity was hired to manage New Hampshire's UNIQUE College Investing Plan.
Details for the Tuition Plan Inc. investment program still need to be hammered out in contract negotiations with TIAA-CREF, but plan officials hope the program will be rolled out next June, subject to Internal Revenue Service or congressional approval.
Craig McCoy, vice chairman of the TPI board of directors, said he wasn't sure what asset classes would be included in the fledgling fund, but expects a separate account structure will be adopted instead of commingled funds.
Mr. McCoy predicts the fund will reach $5 billion in assets in the next five years. "It could be fairly significant," he remarked about the potential size of the plan.
Richard Libby, interim chief executive officer and president of TPI, has plenty of issues to tackle before rollout.
First, the number of participating colleges and universities must increase. A goal of 400 member institutions has been set before the launching of the program -- only 57 schools have signed on so far. Most of the schools are in the southern and eastern parts of the United States; the company hopes to gain a geographical diversification of its membership.
The fund also will need rulings from the IRS and Securities and Exchange Commission to be successful. On the regulatory to-do list: the investment return member institutions earn on prepaid tuition amounts will need to be exempt from federal income tax; holders of the fund's $1,000-denominated contracts must be subject to the same taxes as savers in existing college savings plans; and a guarantee the contract will not require registration as an investment security.
TPI also has filed a request for a no-action letter from the SEC. Rulings from both entities are expected by the end of the summer.
Federal legislation is pending to extend tax exemptions to the program to match those exemptions of existing state programs. Schools already in the program were asked to contact their representatives to help push the legislation through.
The program's main goal is to "remove the risk" of investment return and tuition inflation for prospective students and their families by transferring the risk to the college or university. The contract purchase will make up the full or partial payment of tuition regardless of how well TPI's return is and how much tuition increases in the future. Projections suggest that for a newborn child, guaranteed future tuition could be purchased for as little as 55% of current tuition.
The program, with a rollout expected this fall, will invest in a mix of equities, bonds and money market instruments offered by TIAA-CREF. Allocations will be weighted based on the beneficiary's age.
The State of New Hampshire hired Fidelity Investments, Boston, to provide bundled services for its new prepaid college savings program, known as the UNIQUE College Investing Plan. It is available nationally, with no state residency requirement for investment.
Fidelity will provide administration and money management for the New Hampshire plan. Fidelity has designed seven investment portfolios that are age-weighted. Assets invested for preschool-aged children will have a higher equity exposure, for example, than portfolios for children nearer college age. Fidelity will allocate funds within a UNIQUE account to the appropriate portfolio and automatically move the account through the age-weighted portfolios.
The New Hampshire Plan is Fidelity's second prepaid tuition plan client. Fidelity also manages the State of Delaware's program, which is only open to Delaware residents.
After reading a brief description of the new state-sponsored college savings plans, 68% of parents surveyed said they would be "somewhat to very likely" to consider using them. These parents projected the cost of college to be about $30,000 per year at a state college and $45,000 per year at a private university.
Under the Tax Payer Relief Act of 1997, families can save for college tuition, room and board and other expenses on a tax-deferred basis. There is a flexible contribution schedule and no income limit on the participant. The accounts can accumulate a bit more than $100,000 in total; an investment of up to $50,000 per beneficiary per year is possible without the participant having to pay gift tax. Any family member or friend can contribute to a single account. Money can be withdrawn at any time subject to federal income tax and a penalty on earnings if the assets aren't used for higher education.
Christine Williamson contributed to this story.