TIAA-CREF struggles with changes in 529 business

By Charles Paikert

NEW YORK — TIAA-CREF's days as a leader in the Section 529 college savings program business might be numbered.

The New York-based non-profit manages 529 plans for a dozen states, more than any of its competitors.

But as state contracts come up for renewal, there are growing indications that the number might be sharply reduced. That's because the company is struggling to bolster its business with larger states and might try to prune unprofitable relationships with smaller states.

Under the bottom-line-oriented leadership of Chief Executive Officer Herb Allison, a former executive with Merrill Lynch & Co. Inc. who joined TIAA-CREF nearly three years ago, the non-profit appears to be reassessing how it approaches the 529 business, especially its relationships with smaller states, which have relatively low assets in their plans.

Tennessee's BEST Savings Plan, for example, has only $27 million in assets, a far cry from the more than $12 billion in net assets that top-ranked Virginia has in its CollegeAmerica 529 plan in Richmond.

Tennessee's contract with TIAA-CREF runs out in May 2007, and Janice Cunningham, Nashville-based executive assistant to state Treasurer Dale Sims, does not expect the firm to continue the relationship.

"I think they are rethinking what they are going to do," she said.

Officials with the $72 million Idaho College Savings Program in Boise are also unsure if TIAA-CREF is interested in renewing its contract with the state, which expires next March.

"We're waiting for them to get back to us," said Liza Carberry, Boise-based investment manager for the state treasury and chairwoman of the program. "I don't know if they know what they're going to do yet. They've been very closemouthed, but they have said if they decide not to rebid for the contract, they would roll it over until we find someone else."

Phillip Rollock, vice president of TIAA-CREF Tuition Financing Inc., declined to be interviewed and did not answer specific questions by e-mail. He did, however, release a statement that reads in part: "As the 529 market continues to evolve, we continue to evaluate our plans to position ourselves to maintain our leadership in the 529 marketplace. We are continuously evaluating new opportunities to expand our business in order to meet the needs of families seeking to save for college."

While TIAA-CREF might be shying away from smaller states, keeping 529 contracts coming up for renewal with bigger states that have more assets could prove difficult, as might prospects for adding other states with attractive 529 assets.

In September, TIAA-CREF and other bidders lost out to Baltimore-based T. Rowe Price Associates Inc., which was awarded an eight-year contract by Maryland for its College Investment Plan in Baltimore, with $553 million in assets.

TIAA-CREF's contract with California's Golden State ScholarShare College Savings Trust 529 program in Los Angeles, which has $1.7 billion in assets, ends a year from now, but its management of the plan has received some low marks from the state.

According to Alice Scott, director of public liaison for the state treasurer's office in Sacramento, TIAA-CREF Tuition Financing fell below several established benchmarks.

Two of TIAA-CREF's funds, the Growth Equity Fund and the Growth and Income Fund, were terminated "due to underperformance," she said. Also, the company's "year-over-year administrative performance has declined," she added.

Last year, she said, TIAA-CREF underperformed 18 out of 46 administrative benchmarks, including timeliness of financial- and non-financial-correspondence and tax report accuracy. It also "fell short of the 2004 (marketing) benchmark of 47,380 new unique accounts, reaching only 52.7% of the benchmark."

Missouri's contracts with TIAA-CREF for its Missouri Saving for Tuition Program in St. Louis run out in May. But Mr. Allison ruffled feathers there when he lobbied the state treasurer's office, a shareholder in TIAA-CREF's actively managed institutional funds, to vote for a nearly quadruple increase in fees for the funds last month. Shareholders voted down the proposed increase. Mark Hughes, director of policy and communications for the Missouri state treasurer's office in Springfield, called the timing of the vote "very unfortunate."

Missouri, which has more than $700 million in 529 assets, has issued a request for proposals for potential program managers for its 529 programs, with bids due at the end of the month. Approving a fee hike for TIAA-CREF, Mr. Hughes said, "would send a message that (the treasurer's office and 529 board) were comfortable with a greater load on account holders." That, he said, "is not the position of the treasurer or the board, nor is that the message we want to convey to potential program managers as they formulate their bids."

In fact, with contracts up for renewal in California, Missouri and Michigan, TIAA-CREF's 529 competitors are hoping for a repeat of two years ago, when New York state's 529 College Savings Program dumped TIAA-CREF as its program manager and administrator when its contract expired. New York instead hired Upromise Investments Inc. of Needham, Mass., and The Vanguard Group Inc. of Malvern, Pa.

"Some very big opportunities are coming up," said Andrea Fierstein, managing member of New York-based AKF Consulting LLC. "Just as TIAA-CREF was challenged in New York, I do believe they will be challenged in other states."

"I think (TIAA-CREF) rushed their strategy by getting as many states as they could," said a top executive for a rival program manager, who asked not to be identified. "They're finding out it's an expensive business to have multiple businesses in multiple states. And they have a number of second-tier states with little assets, along with an infrastructure that has to support them."

Charles Paikert is a reporter for InvestmentNews, a sister publication of Pensions & Investments.