Illinois State Treasurer Michael Frerichs on Tuesday will announce that the state is reducing fees and giving more investment choices to people saving money for college in the state’s 529 college savings plans.
The changes will be implemented in July as the state winds down its management contract with Oppenheimer’s OFI Private Investments Inc. and turns over management of the funds solely to Union Bank & Trust Co.
Along with the change in the contracts, the state will cut management fees roughly in half, Frerichs said. In addition, while people previously could choose only Oppenheimer and Vanguard Funds, the state has broadened the selection to include 12 fund companies — including BlackRock, T Rowe Price, Vanguard and Chicago-based Ariel and Nuveen Asset Management. Each fund carries its own fees.
Investors will be able to keep fees especially low by investing in portfolios that blend stock and bond index funds in proportions that change as children age, or they will be able to select more elaborate portfolios that include “actively managed” funds. These funds are more expensive and employ stock and bond managers who buy and sell stocks and bonds on a continuous basis. Fees in portfolios made up of a blend of index funds will drop to 0.13 percent. Portfolios made up of “active funds” — which employ investment experts to pick and choose stocks and bonds — will drop to 0.44 percent.
The 529 plans are offered by states. They allow people, mostly families, to put away money for college and avoid paying taxes on any money withdrawn to pay for college.
Currently, the state offers two funds for people who work with financial planners or investment advisers on their 529 plans. But in July that will change. People who use advisers will be converted to Bright Directions, a single plan that will be available to people who use financial planners or investment advisers. The change does not require any action by individuals. Bright Start Direct, which will support people who make decisions without advisers, will continue to operate.
Frerichs said the changes will make Illinois’ 529 plans more competitive with those offered by other states and will give families saving for college more choices at lower costs. Besides lowering the management fees, the state will no longer charge annual fees.
There is currently about $9 billion invested in the state’s 529 plans.
States compete to attract money into their 529 plans, by cutting their fees, said Leo Acheson, a Morningstar analyst. He said that Illinois already was offering 529 plans that were charging fees below the national average, and that additional cost-cutting would make the state’s plans more competitive.
The performance of the Bright Start 529, which is sold to individuals directly, has been better than average while the fund sold by advisers was mediocre, Acheson said. He has examined changes planned by Union Trust and thinks they will improve performance.