SSgA Steals 529 Plan From Vanguard

April 18, 2012

State Street’s rebrands 529 plan with $965 million in AUM, following iShares into untapped college savings market.

State Street Global Advisors, the fund manager behind the SPDR ETFs, launched on Tuesday a rebranded $965 million Nevada 529 Plan college savings plan comprising only ETFs, which formerly had its investments managed by Vanguard.

The new SSgA Upromise 529 Plan replaces the Upromise College Fund, for which Vanguard served as an investment advisor. The new plan is part of a three-way partnership between SSgA, the state of Nevada and Upromise Investments, a company focused solely on providing 529 plans to state partners and families saving for colleges.

As part of the changeover on April 16, $965 million transitioned from mutual funds and other investments managed by Vanguard into 15 separate SPDR ETFs, including funds based on emerging markets, corporate bonds and target date bonds.

By using ETFs, the revamped 529 fund brings the cost down from 57 basis points to 49, beating the previous Vanguard plan that was predominantly focused on mutual funds.

The diverse menu of ETFs also helped strengthen SSgA’s bid, according to Steve Coyle, head of U.S. Sub Advisory Business at SSgA. “The lowering of cost is very important,” Coyle said in an interview. “But one key differentiator is that we are bringing tactical asset allocation to this and we can choose among 15 different revenue streams—so the result is a very sophisticated-looking portfolio.”

Named for the section of the Internal Revenue Code that allows them, 529 plans are tax-advantaged investment vehicles designed to encourage saving for future higher-education expenses. The vehicles represent a huge untapped market for the ETF industry.

Upromise Investment Advisors LLC, a subsidiary of Sallie Mae, services 31 such plans across 16 states with $37.5 billion in assets as of Dec. 31, 2011. iShares already has a piece of the 529 business with more than $1 billion spread across five funds, including the $120 million ETF-based Arkansas 529 Plan, for which it is the sole investment manager, as well as having a role offering an ETF option for 529 plans in the states of Missouri, Indiana, Ohio and Maine. This coming summer, iShares will be offering a 529 plan in conjunction with the state of Nebraska. However, in general, ETF providers have been slow to steal market share.

However, Coyle expects interest to ramp up in the near future. “It wouldn’t surprise me if more states started looking at adding exchange-traded funds for their low cost and flexibility,” he said.

Upromise will continue to run the direct selling part of the operation. However, SSgA will open another distribution channel in addition to being the investment manager for the fund, by also serving as the fund’s registered investment advisor marketing agent.

In terms of target dates, SSgA will stick to the schedules previously set in the Vanguard version. “We are rolling those into very similar products in terms of years to college,” said Coyle, “with the distinction that ours will be tactically managed and implemented through SPDR ETFs.”

Coyle also noted that SSgA has no immediate plans to get involved with other 529 plans.



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