[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]
INVESTING FOR THE FUTURE:
529 STATE TUITION SAVING PLANS
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
CAPITAL MARKETS, INSURANCE AND
GOVERNMENT SPONSORED ENTEREPRISES
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
SECOND SESSION
__________
JUNE 2, 2004
__________
Printed for the use of the Committee on Financial Services
Serial No. 108-90
U.S. GOVERNMENT PRINTING OFFICE
95-061 WASHINGTON : 2004
_________________________________________________________________
For sale by the Superintendent of Documents, U.S. Government Printing
Office Internet: bookstore.gpo.gov Phone: toll free (866)512-1800:
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HOUSE COMMITTEE ON FINANCIAL SERVICES
MICHAEL G. OXLEY, Ohio, Chairman
JAMES A. LEACH, Iowa BARNEY FRANK, Massachusetts
DOUG BEREUTER, Nebraska PAUL E. KANJORSKI, Pennsylvania
RICHARD H. BAKER, Louisiana MAXINE WATERS, California
SPENCER BACHUS, Alabama CAROLYN B. MALONEY, New York
MICHAEL N. CASTLE, Delaware LUIS V. GUTIERREZ, Illinois
PETER T. KING, New York NYDIA M. VELAZQUEZ, New York
EDWARD R. ROYCE, California MELVIN L. WATT, North Carolina
FRANK D. LUCAS, Oklahoma GARY L. ACKERMAN, New York
ROBERT W. NEY, Ohio DARLENE HOOLEY, Oregon
SUE W. KELLY, New York, Vice Chair JULIA CARSON, Indiana
RON PAUL, Texas BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio GREGORY W. MEEKS, New York
JIM RYUN, Kansas BARBARA LEE, California
STEVEN C. LaTOURETTE, Ohio JAY INSLEE, Washington
DONALD A. MANZULLO, Illinois DENNIS MOORE, Kansas
WALTER B. JONES, Jr., North MICHAEL E. CAPUANO, Massachusetts
Carolina HAROLD E. FORD, Jr., Tennessee
DOUG OSE, California RUBEN HINOJOSA, Texas
JUDY BIGGERT, Illinois KEN LUCAS, Kentucky
MARK GREEN, Wisconsin JOSEPH CROWLEY, New York
PATRICK J. TOOMEY, Pennsylvania WM. LACY CLAY, Missouri
CHRISTOPHER SHAYS, Connecticut STEVE ISRAEL, New York
JOHN B. SHADEGG, Arizona MIKE ROSS, Arkansas
VITO FOSSELLA, New York CAROLYN McCARTHY, New York
GARY G. MILLER, California JOE BACA, California
MELISSA A. HART, Pennsylvania JIM MATHESON, Utah
SHELLEY MOORE CAPITO, West Virginia STEPHEN F. LYNCH, Massachusetts
PATRICK J. TIBERI, Ohio BRAD MILLER, North Carolina
MARK R. KENNEDY, Minnesota RAHM EMANUEL, Illinois
TOM FEENEY, Florida DAVID SCOTT, Georgia
JEB HENSARLING, Texas ARTUR DAVIS, Alabama
SCOTT GARRETT, New Jersey CHRIS BELL, Texas
TIM MURPHY, Pennsylvania
GINNY BROWN-WAITE, Florida BERNARD SANDERS, Vermont
J. GRESHAM BARRETT, South Carolina
KATHERINE HARRIS, Florida
RICK RENZI, Arizona
Robert U. Foster, III, Staff Director
Subcommittee on Capital Markets, Insurance and Government Sponsored
Enterprises
RICHARD H. BAKER, Louisiana, Chairman
DOUG OSE, California, Vice Chairman PAUL E. KANJORSKI, Pennsylvania
CHRISTOPHER SHAYS, Connecticut GARY L. ACKERMAN, New York
PAUL E. GILLMOR, Ohio DARLENE HOOLEY, Oregon
SPENCER BACHUS, Alabama BRAD SHERMAN, California
MICHAEL N. CASTLE, Delaware GREGORY W. MEEKS, New York
PETER T. KING, New York JAY INSLEE, Washington
FRANK D. LUCAS, Oklahoma DENNIS MOORE, Kansas
EDWARD R. ROYCE, California MICHAEL E. CAPUANO, Massachusetts
DONALD A. MANZULLO, Illinois HAROLD E. FORD, Jr., Tennessee
SUE W. KELLY, New York RUBEN HINOJOSA, Texas
ROBERT W. NEY, Ohio KEN LUCAS, Kentucky
JOHN B. SHADEGG, Arizona JOSEPH CROWLEY, New York
JIM RYUN, Kansas STEVE ISRAEL, New York
VITO FOSSELLA, New York, MIKE ROSS, Arkansas
JUDY BIGGERT, Illinois WM. LACY CLAY, Missouri
MARK GREEN, Wisconsin CAROLYN McCARTHY, New York
GARY G. MILLER, California JOE BACA, California
PATRICK J. TOOMEY, Pennsylvania JIM MATHESON, Utah
SHELLEY MOORE CAPITO, West Virginia STEPHEN F. LYNCH, Massachusetts
MELISSA A. HART, Pennsylvania BRAD MILLER, North Carolina
MARK R. KENNEDY, Minnesota RAHM EMANUEL, Illinois
PATRICK J. TIBERI, Ohio DAVID SCOTT, Georgia
GINNY BROWN-WAITE, Florida NYDIA M. VELAZQUEZ, New York
KATHERINE HARRIS, Florida
RICK RENZI, Arizona
C O N T E N T S
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Page
Hearing held on:
June 2, 2004................................................. 1
Appendix:
June 2, 2004................................................. 39
WITNESSES
Wednesday, June 2, 2004
Bullard, Mercer E., President and Founder, Fund Democracy, Inc.,
and Assistant Professor of Law, University of Mississippi
School of Law.................................................. 18
Cantor, Diana, Executive Director, Virginia College Savings Plan
and Chair, College Savings Plans Network....................... 6
Lackritz, Marc E., President, Securities Industry Association.... 11
McNeela, Daniel, Senior Analyst, Morningstar, Inc................ 15
Olivas, Michael A., William B. Bates Distinguished Chair in Law
and Director, Institute for Higher Education Law and
Governance, University of Houston Law Center................... 13
Williams, Jacqueline, Executive Director, Ohio Tuitions Trust
Authority and Member of the Executive Committee, College
Savings Plans Network.......................................... 8
APPENDIX
Prepared statements:
Oxley, Hon. Michael G........................................ 40
Gillmor, Hon. Paul E......................................... 42
Hinojosa, Hon. Ruben......................................... 44
Kanjorski, Hon. Paul E....................................... 45
Bullard, Mercer E............................................ 47
Cantor, Diana................................................ 78
Lackritz, Marc E............................................. 89
McNeela, Daniel.............................................. 129
Olivas, Michael A............................................ 133
Williams, Jacqueline......................................... 156
INVESTING FOR THE FUTURE:
529 STATE TUITION SAVING PLANS
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Wednesday, June 2, 2004
U.S. House of Representatives,
Subcommittee on Capital Markets, Insurance
and Government Sponsored Enterprises,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to call, at 10:06 a.m., in
Room 2128, Rayburn House Office Building, Hon. Richard H. Baker
[chairman of the subcommittee] Presiding.
Present: Representatives Baker, Gillmor, Oxley (ex
officio), Biggert, Capito, Kennedy, Tiberi, Brown-Waite,
Kanjorski, Hooley, Sherman, Meeks, Inslee, Moore, Lucas of
Kentucky, Crowley, Clay, McCarthy, Baca, Emanuel, and Scott.
Chairman Baker. I would like to ask our meeting to come to
order and welcome our witnesses to the table this morning.
This morning, the committee meets to examine the manner in
which special State education enhancement programs function for
the benefit of prospective college students and moms and dads,
typically characterized as Section 529 plans. All States, with
the exception of Washington and the District of Columbia, have
established some 529 plan and make it available to their
constituents.
While the SEC does not have direct supervisory
responsibility for the conduct of the 529 plans, they do, under
Federal securities law, exercise jurisdiction with regard to
fraud and other misconduct as well as having direct
responsibility to regulate the broker dealers and the municipal
security dealers that sell interest in 529 plans. So there is a
Federal nexus for some examination of the manner in which these
plans are operated.
In the past several years, the committee has engaged in
market-sector by market-sector review of current regulatory
structure and determined the adequacy of current disclosure
regimes, the transparency, suitability, the method by which the
average consumer may judge whether a particular investment is
appropriate for their needs.
Chairman Oxley has recently written the SEC with his own
list of questions relative to the 529 plan disclosure
requirements that raise several interesting points. One of the
obvious and apparent conclusions that I have reached is, there
is not, at least today, a national standard of conduct for a
State 529 plan to provide comparability between States. If one
is enrolled in a plan in State A and then subsequently moves to
State B, there may be tax consequences to the individual that
are not clearly understood or perhaps properly disclosed today.
Whether or not the offering materials are substantially
different in content and presentation from marketing materials,
whether there is sufficiency in clear disclosure of fee
schedules, many of these issues sound like repeats of the same
questions on other subjects in months past. And so the
committee's review of these matters is certainly understandable
and appropriate given our market sector responsibilities.
I will say that, today, I feel we have invited individuals
to give the committee insight into the manner by which 529
plans function that have already exhibited high standards of
professional conduct and perhaps can give us insight into where
the industry may be moving.
And I wanted to conclude my remarks simply with an
observation. It may be that an enhanced self-regulatory model
may work well here as well and that, by States conducting their
own review and examination, could come to standards for
comparability on a national scale that could perhaps result in
recognition of some system that an individual 529 plan might
receive a nationally recognized merit award or status or
recognition, thereby indicating to a State who refuses to adopt
the model code that there are certain elements of that State's
plan which are perhaps aberrant or not sufficient to warrant
such recognition.
I would much prefer to see a self-regulatory model at this
point than having the Federal Government intercede into another
area where their participation may not be necessarily welcome
in the first place.
To that end, I certainly appreciate those who are
participating in the hearing this morning. It is the beginning
of our process of understanding, and we certainly will reach no
conclusions before a thorough exchange of ideas has been
provided to all stakeholders. With that, I yield such time as
the gentleman may consume to Mr. Kanjorski.
Mr. Kanjorski. Thank you, Mr. Chairman.
Mr. Chairman, in Pennsylvania, we take pride in reminding
others of many wise observations of Benjamin Franklin. As I
prepared for today's hearing, I was accordingly reminded of one
of his more insightful reflections, ``An investment in
knowledge always pays the best interest.'' this statement is as
true today as it was more than 200 years ago in part because of
Section 529 tuition savings plans.
During the last decade, the cost of attending a university
has increased 40 percent while the typical household income has
increased just 12 percent. Additionally, the average cost of
attending a 4-year university now stands at $34,000 for State
institutions and at $90,000 for private colleges. Moreover, the
price tag for a higher education is expected to continue to
grow in the future, likely continuing to outstrip any gains in
families' earnings.
Because Democrats and Republicans alike recognize that an
investment in higher education continues to produce appreciable
returns for individuals in society, we have worked
cooperatively in recent years to help families cover this
necessary financial expense. In 1996, for example, we joined
together to create 529 plans. As a result, families today can
use this instrument to set aside money for higher education
purposes that grows free of any Federal tax.
Section 529 plans have grown greatly in popularity since
their inception in the late 1990s, and they are now one of the
most common ways to save for a college education. Total assets
in 529 plans which stood at $2.6 billion at the end of 2000
rose to $8.5 billion at the close of 2001. They also doubled in
value in 2003, reaching $35 billion and covering more than 4
million accounts by the year's end.
In addition, the experts at the Federal Research
Corporation now predict that American families will invest $300
billion in 529 plans by 2010. The tremendous expansion of the
tuition savings plans industry has now produced some
predictable growing pains. Although we created 529 plans in the
Federal Tax Code of 1996, we did not simultaneously implement a
comprehensive regulatory regime to cover this financial
product. As a result, some have begun to raise concerns about
the need to improve the oversight of this sector of our
financial system.
For the purposes of our securities laws, the States
generally have oversight responsibilities for Section 529
plans. One problem that has received substantial attention in
recent months with respect to the 529 plans concerns the
disclosures that investors currently receive about the
performance of these financial products. As we will hear later
this morning, many States have begun to take action on their
own to protect investors, including working to develop a model
disclosure regime.
National authorities in recent months have also begun to
examine 529 plans which remain subject to Federal antifraud
rules and broker dealer sales practice requirements. Earlier
this year, the Securities and Exchange Commission announced the
creation of a task force to study the fee disclosure regime and
sale of 529 plans. Additionally, we have learned that the
National Association of Security Dealers is now investigating
whether some brokers in selling out-of-State 529 plans
ultimately exposed their clients to lower investment returns
and higher State taxes.
From my perspective, it is very important to study these
issues and for State and Federal regulators to take coordinated
action to protect families who invest in 529 plans. Greater
standardization in disclosing fees and expenses will facilitate
direct comparisons in performance between the various 529 plans
across State lines. I am therefore pleased that the College
Savings Plans Network has begun the work needed to implement a
comprehensive disclosure system that will provide a greater
comparability of 529 plans for investors and help to ensure
that we have access to the same quality of information as
mutual fund investors.
As we proceed today, I hope they will also examine the
interplay between 529 plans and the proposal by the Bush
Administration to create life savings accounts. As currently
conceived, LSAs will permit individuals to save money tax-free
for any purpose, including higher education. A recent study by
the Senate Finance Committee determined that, because LSAs
would be more flexible than 529 accounts, they could compete
with tax-favored savings programs for education, particularly
among persons with limited disposable income. We should
therefore explore today whether the increased flexibility of
LSAs might undermine a family's well-intentioned efforts to
save for a child's higher education.
In sum, Mr. Chairman, I commend you for convening today's
hearings on 529 plans. We should conduct oversight of this
growing segment of our financial marketplace in order to
determine how we can make the present regulatory structure
stronger. The observations of today's witnesses about these
matters will help me in forming my opinions on these issues.
Thank you Mr. Chairman.
[The prepared statement of Hon. Paul E. Kanjorski can be
found on page 45 in the appendix.]
Chairman Baker. I thank the gentleman.
Mr. Oxley.
Mr. Oxley. Thank you, Mr. Chairman. Obviously, welcome to
our panel. I see some familiar faces out there.
We all know that there are few things in life more
essential than a good education. Helping parents save and
invest for their children's higher education is a vital public
policy initiative, particularly in this environment of runaway
tuition costs.
Success of the 529 tuition savings plans is good news, but
it is not surprising. These programs offer all families,
regardless of income, the opportunity to obtain tax-free growth
and distribution on money they save and invest for college
costs. There is now more than $35 billion invested in the 529
plans across the country. And some have predicted that total
assets will balloon to some $300 billion by the end of this
decade.
Given the increasingly important role that 529 plans play
in enabling parents to save for their children's education, I
have become concerned about certain aspects of some of these
plans. For example, why are there such disparities in fees and
the disclosure of those fees? Have the fees charged by these
State-sponsored plans become so exorbitant that they actually
outstrip the tax benefit that Congress has attempted to
provide? Have the States established adequate procedures to
monitor the performance and operation of the investment
managers they hire to run their plans? Are they offering
documents clear and concise?
These are some of the concerns that prompted me to write to
SEC Chairman Bill Donaldson in February of this year. In his
response to me, Chairman Donaldson said that ``the current
State of affairs with respect to 529 plans is complicated and
likely difficult for parents to understand,'' end quote. He
also announced the creation of the chairman's task force on
college savings plans. I am pleased by the commission's
energetic response, and I understand that the task force has
made considerable progress, and I look forward to hearing from
them in the near future.
We have assembled an all-star lineup here today. I
particularly would like to welcome Diana Cantor, the chairman
of the College Savings Plans Network, and Jacqueline Williams,
Executive Director of the Ohio Tuition Trust Authority. I know
that they have put in long hours over the past few weeks to
improve the disclosure regime of 529 plans. And I look forward
to their testimony and that of the rest panel.
Mr. Chairman, again we look forward to the hearing, and I
yield back.
[The prepared statement of Hon. Michael G. Oxley can be
found on page 40 in the appendix.]
Chairman Baker. I thank the gentleman for his participation
and his statement.
Are there any members wishing to make additional open
statements at this time?
Mr. Scott.
Mr. Scott. Thank you very much, Mr. Chairman. This is
indeed a very important hearing and has some very important
ramifications for my State of Georgia. And I certainly want to
thank you Mr. Chairman and also Ranking Member Kanjorski for
holding this hearing today regarding State-sponsored 529
college tuition savings plans. I believe that it is very
important for this committee to examine the legitimacy and
disclosure fees that some 529 plans are using.
And while this hearing will focus on many of the problems
that have been identified with some State savings plans, my
State of Georgia has a strong record of managing its plan.
Since 2002, the Georgia higher education savings plan has
offered a wide variety of investment options, managed by TIAA-
CREF, an industry-recognized leader in providing investment
services in the education and research communities. In just 2
short years of existence, the Georgia higher education savings
plan has over 42,000 participants who have invested more than
$165 million to pay for college education.
Contributions to the Georgia higher education savings plan
can be made for as little as $25 per beneficiary, per
investment option or as little as $15 for contributions made
through payroll deductions. Up to $2,000 can be deducted per
beneficiary for taxpayers who meet filing status and income
requirements.
Georgia's plan has made savings for college more affordable
with one of the lowest fees among 529 plans across the country.
Participants pay no application fee, no sales charge and no
annual account maintenance fee. An annual management fee, which
is deduced from fund assets, is used to cover the cost of
investment management fees and expenses as well as
administrative services. The annual all-inclusive fee is only
0.85 percent of assets.
While Georgia has a 529 plan that maintains low and
reasonable fees, other States have not managed their plans
quite as well. And I look forward to hearing from this
distinguished panel of witnesses today to discuss efforts to
improve the management of 529 plans.
Among the issues that I will be looking for information on
are whether the 529 plan administrators exercise sufficient
oversight of the intermediaries they employ to sell interest in
their plans, whether the disclosures given to investors are
sufficient to permit informed investment decisions, and whether
greater standardization in fee disclosure to facilitate
comparability is achievable and whether the fees charged by
some 529 plans negate the expected tax benefits from the
investment.
Thank you for coming, and this is a very distinguished
panel. And I look forward to hearing your comments.
Thank you, Mr. Chairman.
Chairman Baker. I thank the gentleman.
Are there further opening statements?
If there are no further opening statements, I would like to
move at this time to our first witness, Ms. Diane Cantor,
chairman of the Executive Board, College Savings Plans Network.
And I wish to commend you for your good work in this area
and also, on a personal aside, seeming to be a continuing
positive influence in Mr. Eric Cantor's conduct. So I welcome
you here this morning.
STATEMENT OF DIANA CANTOR, CHAIRMAN, EXECUTIVE BOARD, COLLEGE
SAVINGS PLANS NETWORK
Ms. Cantor. Thank you, Mr. Chairman. Thank you Member
Kanjorski and distinguished members of the committee. My name
is Diana Cantor. I am the executive director of the Virginia
college savings plan and chairman of the College Savings Plans
Network, an affiliate of the National Association of State
Treasurers that has represented State 529 college savings and
prepaid tuition plans since 1991. I thank you Mr. Chairman for
the opportunity to address your committee.
The cost of attending college, whether public or private,
continues to rise steadily. In order to send their children to
college, American families increasingly rely upon debt to meet
the rising cost of a higher education. Despite the cost, the
value of a higher education is undeniable.
The best answer to rising college costs is to encourage
families to save in advance. The States began creating prepaid
tuition and savings plans more than a decade ago to help
families cope with spiraling tuition costs. The theory has
worked. Give families a tax advantage, disciplined, safe way to
save for college expenses, and they will use it.
There are two types of Section 529 plans, prepaid and
savings. Prepaid plans are similar to a defined benefit pension
plan where the family is purchasing a defined amount of future
tuition years of credit. Savings trusts are more analogous to
defined contribution plans. Families can save in a variety of
investment options, including equity and fixed-income mutual
funds, actively managed accounts, money market, and stable
value funds.
Families participating in 529 plans are specifically saving
for college where otherwise they may not set aside money for
that purpose. The programs, through their marketing efforts,
draw attention to the need to save for college early and help
many families across the country take that all-important step
of beginning to save.
State college savings programs have achieved phenomenal
success. With the enactment of the Economic Growth and Tax
Relief Reconciliation Act, the number of children participating
in our programs has skyrocketed. Every State in the Nation plus
the District of Columbia now has at least one Section 529
savings option designed to meet the particular circumstances
and policy goals of their States. States are able to offer
their participants an opportunity to invest in funds and
actively managed accounts that may otherwise be unavailable to
them due to high minimum investment requirements. Savings plans
typically do not have age or residency requirements as is
common with prepaid tuition plans, so investors are free to
choose any plan across the country that best meets their needs.
Today, with assets topping $40 billion in savings plans and
$10 billion in prepaid tuition plans nationally, these plans
are receiving increased attention. The Securities and Exchange
Commission, in response to an inquiry from Chairman Oxley,
recently announced the creation of a Section 529 task force to
review among other things disclosure and fee issues. Questions
have been raised as to why our programs may look different from
State to State.
Our feelings as State administrators are that the unique
features of our plans provide their prime attraction, the
ability of each State to craft a program that best suits its
citizens' needs and further that State's higher education
policy.
Over a year ago, the College Savings Plans Network
undertook an effort to create voluntary disclosure principles.
These principles were adopted in draft form just last week at
our network's annual meeting. The goal of the principles is to
provide a framework for disclosure so that an investor can
easily understand his or her own State plan as well as compare
Section 529 plans on an apples-to-apples basis. They contain
recommendations on information that should be prominently
stated, such as the need to consider State tax treatment and
other types of benefits and the availability of other 529
programs offered by that State.
The principles also contain tables and charts which provide
clear, concise and consistent descriptions of fees, expenses
and investment performance. Fees will continue to vary among
these plans as fees differ among all types of non-529
investment options. Consumers do not expect to pay the same
fees for a completely passive large cap index fund as they do
for an actively managed international equity fund. Nor do they
expect to pay the same for a direct-sold investment as they
would for an advisor-sold product. But the intent of our
disclosure guidelines is to make comparing the same types of
plans much easier.
State oversight of their 529 plans provides an additional
layer of accountability and protection for participants in
these plans. States, such as Ohio, Louisiana, and Wisconsin,
have already reacted to the current environment by expanding
investment options, adding low-cost funds, and lowering fees.
As creatures of State law, Section 529 plans are subject to
multiple levels of oversight that help protect the programs'
participants. Each State is governed by its own administrative
procedure laws, procurement laws, ethics and conflict-of-
interest statutes and freedom of information or Government in
the Sunshine acts.
The plans are all administered by State boards, authorities
or trusts. By statute or regulation, the operating authorities
are required to follow prudent personal standards in selecting
and retaining funds or managers. All of the programs are
subject to financial audit and reporting requirements.
Promoting greater access to higher education and
encouraging savings over debt is sound public policy. The
existing State college savings programs promote these goals and
reduce the need for financial aid and student loans.
Mr. Chairman, these programs are working. These plans have
already provided benefits to more than 400,000 students
nationwide and another 6 million children are waiting to use
their accounts. In closing, Mr. Chairman, Section 529 plans are
flourishing, and families are using these plans in record
numbers to save for their children's future.
Congress' mission in creating 529 plans is being
accomplished. We, along with our partners in the financial
services industry, will work together to continue to improve
these plans and to serve America's families and our most
important customers, America's children.
Thank you again, Mr. Chairman, Ranking Member Kanjorski,
distinguished Members of the committee, for your support of
State college savings programs and the millions of families
across America who participate in them. We look forward to
continuing to work with your committee to continue to provide
the best college savings options available through Section 529
plans. Thank you.
[The prepared statement of Diana Cantor can be found on
page 78 in the appendix.]
Chairman Baker. I thank you for your statement.
For the purposes of our next introduction I would yield
such time as the gentleman may consume to the gentleman from
Ohio, Mr. Tiberi.
Mr. Tiberi. Thank you, Mr. Chairman.
It is a pleasure to introduce another central Ohioan,
Jacqueline Williams, who is the executive director of the Ohio
Tuition Trust Authority. Jackie was appointed executive
director of the Ohio Tuition Trust Authority in June of 1999.
She has held leadership positions in both the public and
private sector. She is president of the Columbus Board of
Health, serves on the Columbus Cancer Clinic Board. She earned
both her master's and her bachelor's degree at Miami University
in Oxford, Ohio, one of the alma maters for our chairman to the
left here.
On a personal note, Mr. Chairman, I had the opportunity
during my last term of the General Assembly to work with Ms.
Williams, and she was respected by members on both sides of the
aisle.
And it is a real pleasure to work with you and thank you
for being here to offer your expert testimony, Ms. Williams.
STATEMENT OF JACQUELINE WILLIAMS, EXECUTIVE DIRECTOR, OHIO
TUITION TRUST AUTHORITY
Ms. Williams. Thank you very much. Thank you for the
wonderful introduction.
Mr. Chairman, Ranking Member Kanjorski, and members of the
committee, this is a real pleasure to speak to you today
regarding 529 plans and to share one State's history and
philosophy regarding these plans.
My name is Jackie Williams, and I am the executive director
of the Ohio Tuition Trust Authority and a member of the
Executive Committee of the College Savings Plans Network. The
Ohio Tuition Trust Authority is an independent, self-supporting
State agency which is governed by an 11-member board
representing business, higher education, and elected officials.
Ohio was one of the first States to offer a qualified
tuition program, and in 1989, the General Assembly in Ohio
created the trust authority to help with the following
objectives: Make higher education more affordable and
accessible to Ohio citizens, to assist State universities by
providing a stable financial base, to protect Ohio citizens
from rising tuition costs, to encourage savings, and to promote
secondary and post-secondary academic excellence.
Since 1989, almost 25,000 students have attended college
using over $232 million invested in Ohio's plan. But according
to the recently completed report of Ohio's Governor's
Commission on higher education and the economy, only 11 States
have smaller portions of their populations who have earned
baccalaureate degrees. The report states that Ohio's economic
growth and prosperity is inextricably linked to increasing
participation by Ohioans in higher education.
We offered initially a unit-based prepaid tuition plan
called the Guaranteed Savings Fund, and our State provided a
tax exemption on earnings as an incentive for families to save.
In 1994, the Ohio General Assembly supported and the voters of
Ohio approved a constitutional amendment to provide the State's
full financial backing for that prepaid plan in the event the
fund could not meet future obligations. So clearly, this was a
very high priority for our State.
In 1996, when Congress established qualified State tuition
programs and added Section 529 to the Internal Revenue Code,
Ohio's program fell under the guidelines established for such
programs. And in 1999, the tuition trust proposed legislative
changes to the agency's statute to take advantage of these
Federal changes. The Ohio General Assembly unanimously
supported the decision to offer more diverse choices for
investments and also expanded the tax incentive by providing a
$2,000 State tax deduction on contributions to the program.
We undertook an extensive competitive bid process to select
and hire a firm to provide investment management, marketing and
administrative services. Our due diligence included on-site
examinations of bidders by our staff, a review of fees and
performance by our outside consultants, and oral presentations
by finalists. And in 2000, we hired Putnam Investments to
manage the savings program.
The firm was selected for a variety of reasons, but one of
the most important things was their commitment to educate and
sell options to consumers through an extensive network of
financial advisers. This was a deliberate choice on the part of
our board because they wanted to extend the access of these
programs to the public. Our staff, while one of the larger ones
in the 529 industry was never intended to grow large enough to
address the more than 11 million people in the State of Ohio.
Our plan is sold through financial advisors and directly
through the tuition trust. The advisor-sold component offers 17
market-based options, and those same options are available
directly through the trust authority at a lower cost for Ohio
residents. Over the past 4 years, we have experienced
significant growth in our program. In our State alone, over
$1.1 billion has been invested through CollegeAdvantage on
behalf of 186,000 beneficiaries. And the average account value,
despite the fact that most of these programs will allow people
to save significant amounts for private or public education,
graduate school et cetera, the average account value is $7,500.
However, we continue to refine and enhance our program, and
in the spring of 2003, we conducted market research of Ohio
citizens who had relatives under age 18 to whom they felt some
obligation to help save for college. Among respondents who were
saving, bank accounts were the most popular vehicle. And while
9 percent were using CollegeAdvantage to save, 28 percent were
using taxable instruments. And fully half of all respondents,
despite the fact that they had children or grandchildren, were
not saving at all.
The other point that came out was that fully two-thirds of
the people responding considered themselves to be do-it-
yourself investors and wanted very clear, easy-to-understand
savings options. To meet the needs uncovered through research,
we took a two-step approach. And in January of this year, we
issued an RFP to index fund managers for a low-cost index
provider. Through a competitive selection process, we hired the
Vanguard Group in March. And in May we added 15 Vanguard
investment options to CollegeAdvantage.
We will soon issue an RFP to Ohio banking institutions for
a 529 savings account and at least one-time deposit product.
The goal would be to distribute these products through the
bank's distribution channels including branch locations, on-
line bank centers, call centers, workplace programs and other
access points, because our job is to make sure that our
citizens have full access to these programs. We offer flexible
contribution methods through electronic funds transfer, payroll
deduction, on-line contributions, no enrollment fee, and
minimum contributions of $15. We also have made college more
affordable by having some of the lowest fees in the industry,
and while total expense ratios will definitely vary with the
type of investment option, the lowest all-inclusive fee
available through our program, is 35 basis points.
So we have done a considerable amount to standardize the
information that is available over the past several months to
people in our program, and we believe that we are now leading
the industry in terms of some of the recent enhancements we
have made to our disclosure materials. We are working to
increase access to higher education in our State by offering a
diverse range of investment choices, low fees, affordable
minimum contributions, online access, easy contribution
options, and State tax advantages. These features make Ohio's
program unique and tailored to the needs of Ohio families.
While disclosure information should be standardized across
the 529 industry, each State must be able to shape and define
its own plan to meet the unique needs of its citizens. Our
success is essential if the governor's goal of increasing
participation in post-secondary education by 30 percent or
180,000 students by 2015 is to be reached. Each day, we work
with families one at a time to support their aspirations to
achieve a better future for their children.
Thank you again for the opportunity, Mr. Chairman. We look
forward to working with you and Members of your committee. And
we would be pleased to answer any questions when it is
appropriate. Thank you.
[The prepared statement of Jacqueline Williams can be found
on page 156 in the appendix.]
Chairman Baker. Thank you very much.
I would like to now welcome Mr. Marc Lackritz, president of
the Securities Industry Association, back to the committee.
Welcome, sir.
STATEMENT OF MARC E. LACKRITZ, PRESIDENT, SECURITIES INDUSTRY
ASSOCIATION
Mr. Lackritz. Thank you, Mr. Chairman, and thank you for
the opportunity to testify today about Section 529 plans, how
important they are to financing higher education costs and how
we might work together to improve them.
My name is Marc Lackritz. I am president of the Securities
Industry Association. Our member firms are deeply committed,
Mr. Chairman, to reviving a national culture of saving,
particularly among young people. We have worked very hard to
educate and encourage both students and parents to invest
regularly in a product with marginal risk to help foster a
renewed sense of personal responsibility. One such product, the
Section 529 plans, offers some of the best benefits for savings
for college.
Our members are actively involved in all phases of the
management and marketing of 529 plans because these plans have
easier eligibility and contribution requirements than certain
other investment options, thereby making them accessible to far
more families and people. The enhanced Federal tax benefit
provided by Congress in the tax legislation of 2001 instantly
increased the popularity of Section 529 plans: 63 percent of
these accounts were open in 2001 or later, and participation in
account balances will continue to rise as individuals become
more aware of the tax benefits of the plan.
Indeed, if a family contributed $2,000 annually to a 529
account for 18 straight years and assuming an 8 percent rate of
return, they would have saved nearly $75,000 for college,
enough for most 4-year public institutions across the country.
The favored tax treatment of 529 plans not only enhances
returns but also helps to assure that the funds will be there
when they are needed for college by discouraging withdrawal for
other purposes.
Without the involvement of the States, 529 savings plans
would not exist. States approve the method of distribution both
in-State and nationally, and broker dealers that distribute 529
plans must work with the States to negotiate selling agreements
and produce marketing and other program literature. Tax
treatment of 529 plans is subject to both Federal and State
law. And the Securities and Exchange Commission and the
Municipal Securities Rulemaking Board oversee the broker
dealers and investment advisors who distribute the plans.
Mr. Chairman, we believe there are five different ways to
improve on Section 529 plans. First, make the tax-free
treatment of distributions permanent. The short-term success in
expanding 529 plans from enhanced Federal tax advantages
enacted in 2001 could be undermined by the uncertainty that the
tax incentive will not be made permanent. If Congress does not
extend the provision for tax-free withdrawals on 529 plans,
then, after 2010, earnings in the account will be taxed at the
recipient's rate as they are withdrawn. We would urge Congress
to make the tax-free treatment of distributions permanent as
soon as possible to ensure certainty to participants that the
tax benefit will exist when they make their withdrawals.
Secondly, create tax parity among the States. Creating tax
parity among all 50 States would significantly increase
participation and lower cost for investors. Currently, more
than 50 percent of the State plans have different tax rates and
policies in place. Families and their financial advisors face a
complex challenge to determine the value of particular State's
tax benefit when placed in the proper context of other
investment considerations. SIA and our member firms are
actively working at the State level to achieve tax parity
across the board. We have had some success, although current
State fiscal constraints are hampering broader progress.
Third, we need to improve disclosure. We also believe that
clear, more complete and more understandable disclosure of fee
and investment-related information would help investors make
relevant, consistent comparisons among different types of
plans. Currently, marketing material for mutual funds purchased
through a broker dealer must comply with NASD advertising
rules, and since about 75 percent of 529 plans are sold through
brokers, investment-related disclosure in advertising is fairly
consistent across 529 plans.
However, fees are not disclosed in the uniform way in
program materials with some programs including costs, such as
annual maintenance fees, while others do not. We believe that
all fees should be transparent and should be included in
investment performance information. We have worked with the
States as they develop the draft guidelines that will
standardize both the kind of information disclosed as well as
its location.
Similarly, we support improved disclosures of potential
home-State tax benefits. Under the MSRB guidelines, broker-
dealers must provide disclosure to clients of any potential
home-State tax benefit. However, the location of that notice in
the program description is not standard among plans. We believe
this information should appear on the first page of the program
description to help both investors and their financial
advisors. That statement, however, should also indicate that
tax treatment is only one of many features that should be
weighed by investors in selecting a 529 plan.
Fourth, ensure suitability. Under our securities laws,
broker-dealers must ensure that products that they sell to
their clients are suitable for them. The variety of different
529 plans as well as other education savings vehicles can make
choosing the right one a difficult and confusing exercise for
investors. Registered representatives and financial advisors
help investors make the right investment decisions by
encouraging their clients to consider a variety of factors when
reviewing college savings plan options.
And fifth, improve investor education. Investors continue
to state that they lack the knowledge about investing and that
they want the securities industry's help in educating them. We
have recently updated our free guide to understanding 529 plans
to include a list of questions a 529 investor should consider
before investing in a particular plan. In addition, our
investor education website, pathtoinvesting.org, includes
information on 529 plans as well as opportunities to invest in
a hypothetical account.
In conclusion, Mr. Chairman, SIA is committed to ensuring
that 529 plans remain among the best possible products
available to save for higher education. We have met with
members of the 529 task force established by Chairman
Donaldson, and we will continue our outreach efforts to promote
a greater awareness and understanding of 529 plans. We look
forward, Mr. Chairman, to working with you, the regulatory
agencies and State officials to make permanent the Federal
provision for tax-free withdrawals on 529 plans, achieve tax
parity among the States, improve disclosures, and provide
ongoing education on 529 plans and other appropriate
investments. Together, we will expand the opportunities for all
families to save for their children's education, the most
important investment in our future. Thank you very much.
[The prepared statement of Marc E. Lackritz can be found on
page 89 in the appendix.]
Chairman Baker. Thank you, sir.
Our next witness is Mr. Michael A. Olivas, who holds the
William B. Bates Distinguished Chair in Law and who appears
today as the director of the Institute for Higher Education of
Law and Governance from the University of Houston Law Center.
Welcome, sir.
STATEMENT OF MICHAEL A. OLIVAS, WILLIAM B. BATES DISTINGUISHED
CHAIR IN LAW AND DIRECTOR, INSTITUTE FOR HIGHER EDUCATION LAW
AND GOVERNANCE, UNIVERSITY OF HOUSTON LAW CENTER
Mr. Olivas. Thank you Chairman Baker, members of the
committee and the subcommittee. I appreciate the opportunity to
present testimony this morning and to share some of my research
on prepaid plans and college savings plans which I have been
studying since they began. I will spare you the details. These
are available in fine bookstores everywhere and soon to be a
major motion picture.
I would like to draw your attention to a number of the
issues raised by a colleague, Joseph Hurley, whose annual book,
the Best Way to Save for College, rates these various State
plans. For example, he lists them according to eligibility or
who is able to open an account, an issue that is not as easy as
it seems on the surface: The time or age limitation on the
beneficiary or the eventual user; age-based investment options;
static investment options; the underlying investments; fees and
expenses on a variety of bases; the broker distribution fees;
contributions both the maximum and the minimum; account
changes, such as beneficiary changes, transfers in ownership
and other kinds of things like this, including the ability to
transfer to a sibling or a relative; full faith and credit,
whether actual or political full faith and credit; State
income-tax deductibility exemptions from creditors; whether or
not these are subject to involuntary transfer alienation
clauses; and reciprocity with a variety of other State plans.
As students and these plans become more portable, these
issues are going to continue to vex both enrollment managers,
higher educators generally as well as parents and the children.
Of course, these very many options reflect the maturity of
investment markets and make the various plans extremely popular
with parents and other investors, especially those plans that
offer enhanced portability and the collateral State tax
benefits as program choices.
Of course, these investors have many choices among
investment funds, especially in the State savings plans. A
number of States offer multiple plans. It was mentioned this
morning that one State offers at least 17 at last count. As
attractive as these choices are, an observer cannot help but
question whether a State program really requires as many
investment choices for contract purchasers, each with a
different and often unclear fee structure, investment mix and
track record. The marginal advantages may not be evident in any
annual review while the State's supervisory role is made much
more complicated by the extremely complex bid and review
process, especially in States with intricate procurement and
investment regulations.
This lack of transparency is the clear disadvantage held up
to the mirror of enhanced investor choice. In my judgment, we
may be verging on a system where there are too many choices for
most investors and the system's complexity renders comparable
choice shopping too complicated for most investors,
particularly for those who participate because they are risk-
averse in the first place and do not feel comfortable simply
investing in traditional instruments, beating the markets or
having bank accounts.
There is almost too much dynamism in these plans as the
various States compete with other State plans to offer more
plans and more complex options so as to attract more contract
purchasers. A system can have too many choices and can
intimidate or paralyze unsophisticated buyers especially in
markets that are planned to be churning markets.
This system complexity can be a barrier to market entry for
some persons. Yet another issue is that the range of investment
options may have unintended consequences. Diverse plan options
may encourage purchasers to place all their eggs in one basket.
I have been concerned about the rise of single mutual funds as
State options both with and without brokers in a number of
State plans.
My concern is that people in traditional marketplaces might
choose mutual funds due to their broadly based mix of stocks or
bonds, in some instances, when individual contract purchaser
needs may be poorly suited to such vehicles. Whenever
information, such as how to best allocate and invest in State
programs, is at a premium, the persons least likely to
participate or prosper are the less well-educated, the very
group at whom these programs are aimed, the poor, immigrants
and minorities, especially linguistic minorities.
Thus, system complexity in State prepaid and saving plans
programs, even in States with low barriers to entry and monthly
payment options such as those in Georgia, attract and reward
the most advantaged and knowledgeable participants much like
the college application process itself, which so clearly serves
the interests of advantaged and wealthier students. If
information and investor savvy are needed for these dynamic
investments, State prepaid and savings plans will widen the gap
between the wealthy and the poor, majority and minority,
street-smart and average persons.
Finally, I note that my earlier concerns about the
viability of these programs have largely been met by the
emergence of legislation and favorable tax treatment, including
legal developments. After all, there are a number of us in the
1980s that were wondering how we were going to pay off the
funeral of these plans before they received tax treatment
favorable by this legislature.
However, as in any other public program, it is clear that
the wealthy have more options, and the poor cannot afford to
avail themselves of various tax vehicles or savings programs,
although they value higher education for their children every
bit as much as do the wealthy.
I urge you to facilitate truly comparable disclosure
requirements, full and open participation data which we do not
have at present, usable program investment performance and
comprehensive eligibility and enrollment information.
Because of unique State conditions and political
considerations, each State has fashioned its own plan or plans,
and maybe, we should just rejoice in the thousand flowers that
are blooming. But I fear that the program complexity has made
this generous and useful universe off-putting to many parents
and would-be contributors. I urge, at the very least,
standardization and uniformity with regard to fee disclosures,
which we do not have. And it is not clear to me that those
governed can govern themselves in this regard. That is, it is
not clear to me that the States are in a position to gather
this information and report. I believe that this would be very
troubling, and I think we have a number of categorical
precedent's for this that this committee is aware of as no
other.
I have attached a copy of the various State plans taken
from a recent article, also available in fine book stores
everywhere. I hope that this will be a useful starting point
and will be useful to readers, and if I may answer any
questions or elaborate upon these views, I would be certainly
pleased to do so. Thank you for this opportunity to share my
research and my thoughts with you.
[The prepared statement of Michael A. Olivas can be found
on page 133 in the appendix.]
Chairman Baker. Thank you very much, sir. We appreciate
your attendance.
Our next witness is Mr. Daniel McNeela, senior analyst,
Morningstar, Inc.
Welcome, sir.
STATEMENT OF DANIEL MCNEELA, SENIOR ANALYST, MORNINGSTAR, INC.
Mr. McNeela. Thank you for the opportunity to appear before
this distinguished committee. My name is Dan McNeela, and I am
a senior analyst with Morningstar, Inc., an independent
investment research firm that provides data and analysis on
mutual funds and other investments.
More than a year ago, we began to cover 529 plans which, as
our research has shown, have much to offer. Now, I lead a team
of four analysts that reviews all 529 plans in existence. Our
analysis shows that a well-chosen 529 plan is an attractive
investment vehicle. To inform their decisions, we write
commentaries that detail the benefits afforded to 529
investors. Such advantages include considerable investment
flexibility, tax advantages, high contribution limits, and
diversification.
That said, my testimony today focuses on the shortcomings
of 529 plans. Several areas are in need of substantial
improvement. All too often high costs, poor disclosure and
unreasonably complex structure greatly diminish their potential
value. Some of our greatest concerns relate to the myriad costs
investors pay to participate in a 529 plan. Investors face
enrollment fees, account maintenance fees, administrative fees,
management fees and, in many cases, broker fees. Some of those
costs are dollar-based while others vary depending on the
amount invested in the plan.
Calculating the specific fees associated with a particular
investment option can be a major undertaking. Most plans are
set up as funds of mutual funds whereby a single investment
option represents a basket of underlying funds. To arrive at
the total expenses of a single investment option, investors
must first prorate the costs of the underlying funds depending
on their weighting in the portfolio and add the costs of all
those funds together. Any associated administrative fees and
broker fees, if applicable, must be added to arrive at a total.
Even at that point, dollar-based fees are left unaccounted.
That process is frustrating enough for individual
investors, but most 529 plans exacerbate this problem by
burying this important cost information in the back of a 100-
page-long program disclosure document. At its worst, the
complexity of the cost structure and the reluctance to make the
information easily accessible amount to deceit on the part of
529 providers.
The simplest solution is to require plans to prominently
feature cost information on websites and in their literature.
Costs should be presented both at the base level, so investors
can see what they are paying for, and in aggregate, to
summarize the plan's expenses. In situations where costs vary
depending on the chosen investment option, a total cost for
each investment option should be clearly outlined. In effect,
this summary expense data would serve the same purpose as that
of expense ratios for mutual funds.
Finally, 529 plans should heed the call that mutual funds
are hearing for better cost disclosure by providing cost
estimates in dollar terms as well as percentage terms. A
projection of a total cost based on a $10,000 investment would
serve investors by making comparisons between competing plans
much easier.
Clear disclosure of costs in both percentage terms should
help alleviate the other major problem of 529 plans. In short,
too many plans are prohibitively expensive. One reason plans
are so expensive is that several large groups are in line to
collect fees. With States, fund companies, brokers, and third-
party administrators all putting their fingers in the pie, it
is no wonder that investors can end up with a knuckle sandwich.
Anyone who says that costs don't matter is most likely a
recipient of those fees. Plan costs come out of investors'
pockets on a dollar-for-dollar basis.
Although the debate between low cost index funds and more
expensive actively managed options is worthwhile, overcharging
for lavish advertising campaigns and bloated administrative
expenses is reckless and unfair. A recent review of 529 plans
turned up several with investment options whose costs approach
or exceed 2 percent of assets for Class A shares. This figure
does not include front-end sales costs, which can be as much as
5.75 percent of assets, or any dollar-based fees.
Collectively, these expenses significantly diminish
potential gains. If long-term returns before fees average 6
percent annually, expenses could consume more than a third of
investors' potential gains. The difference between paying 1
percent or 2 percent in annual asset-based fees may seem
minuscule to uninformed investors, but presenting those costs
in dollars and cents and projecting them over a multi-year
period will shed light on this issue. In the aggregate, we can
see how meaningful the potential differences become. With $47
billion currently in 529 plans, a 1 percent asset-based fee
costs 529 investors $470 million annually. At a 2 percent fee
level, annual costs to 529 investors rise to $940 million.
Although fees and their transparency are important issues,
529 plans also have a responsibility to disclose how fees are
used. This concern focuses on administrative fees which vary
greatly among plans. Tennessee's plan, for example, is cheaper
than average overall because it uses low-cost index funds and
lacks a broker sold option. Its cost structure is also simple
because it charges a flat 95 basis points regardless of the
investment option. But Tennessee's administrative costs are
unreasonably high. The plan's disclosure documents do not
explain why it costs nearly 50 percent more than nearly
identical plans offered by Michigan and Missouri. Tennessee
charges as much as 0.88 percent in administrative fees without
accounting for that how that money is being used.
By comparison, Utah reports that it has been able to cover
its operating costs by charging a mere 0.25 percent in
administrative fees. States that offer 529 plans need to be
accountable for fees. Citizens have a right to know how their
money is used.
The first step towards achieving that goal is improved
disclosure. We believe that States should tell investors how
much money they collect and where that money ends up. Are fees
paying for splashy advertising campaigns or defraying the costs
of other projects? To date, States haven't felt compelled to
provide answers.
In a similar vein, residents receive little information
regarding how their States' selected fund company partners.
States should be forthcoming about the selection process and
criteria used. They should fully explain the terms of the deal,
including any benefits the States will receive and how their
choice serves citizens.
The final area in need of improved disclosure is the
evaluation of performance. Investors currently receive
information regarding the performance of the various investment
options for both short-term and long-term periods, but to grasp
how well their plan is performing, investors need to see the
performance of relevant benchmarks alongside the plan's
returns. These benchmarks should reflect the asset classes in
which the investment options are invested.
Because many of the investment options include both stocks
and bonds, blended benchmarks which combine returns from
different asset classes are most appropriate. It is important
that this comparison relates to the actual performance of
investment options net of all asset-based fees. If this is done
properly, plans saddled with poorly performing funds and high
cost structures will have few places to hide.
As a supplement to those numbers, plans should provide
investors with a written commentary explaining why the
investment options did better or worse than their benchmark.
This analysis, which need not be lengthy or complicated, would
markedly demonstrate accountability. Thank you for your time.
[The prepared statement of Daniel McNeela can be found on
page 129 in the appendix.]
Chairman Baker. Thank you very much, sir.
Our next witness is Mr. Mercer Bullard, who appears here
today as president and founder of Fund Democracy, Inc., also an
assistant professor of law at the University of Mississippi.
Welcome.
STATEMENT OF MERCER E. BULLARD, PRESIDENT AND FOUNDER, FUND
DEMOCRACY, INC., AND ASSISTANT PROFESSOR OF LAW, UNIVERSITY OF
MISSISSIPPI SCHOOL OF LAW
Mr. Bullard. Thank you, Chairman Baker and Members of the
subcommittee. And thank you also for the opportunity to appear
before you to discuss 529 State tuition savings plans. It is an
honor and a privilege to appear before the subcommittee today.
I will focus my remarks on the issue of fee disclosure by
529 plans--and that is 529 savings plans, not prepaid plans--
and begin with the aspects where there does not appear to be
much disagreement. There seems to be little disagreement, for
example, that 529 fee disclosure is inadequate. 529 plan fees
are hard to find. They are hard to understand, and they are not
standardized so as to permit easy comparison across different
plans.
The transparent disclosure of fees is critical to the
efficient operation of any market, and the 529 plan industry is
no exception. Unless and until 529 plan fee disclosure is
reformed, plan participants will pay higher fees than they
otherwise would pay.
It would not be surprising if there were also general
agreement about general minimum standards for 529 plan fee
disclosure. 529 plans are in many respects similar to mutual
funds, and 529 plan assets are primarily invested in mutual
funds. Therefore, mutual fund rules are likely to provide at
least a reference point if not a baseline for 529 plan fee
disclosure.
This brings us to areas of potential disagreement. For
example, as the subcommittee is very aware, there is
substantial disagreement by the adequacy of mutual fund fee
disclosure. The SEC has admitted that current mutual fund fee
disclosure requirements are inadequate and has proposed rules
to address some but not all of the most glaring deficiencies. I
hope that these problems will at least be fixed for 529 plans
if not for mutual funds, and I have described in my written
submission the minimum standards that I believe 529 plans
should be held to.
In fact, I believe that fee disclosure requirements for 529
plans should exceed those applicable to mutual funds for two
primary reasons. First, Congress enacted 529 plans for a
specific purpose, to promote investment in higher education,
and Congress is financing this policy with foregone tax
dollars. Every additional dollar spent on 529 plan fees is $1
less that can be spent on higher education. Congress has a
heightened interest in promoting competition and thereby
lowering 529 plan fees.
A second reason 529 plan disclosure rules must go further
than mutual fund rules is that 529 plans are subject to special
constraints that further impede the operation of competitive
market forces and necessitate more aggressive fee disclosure
requirements. These additional anticompetitive constraints
arise from the exclusive sponsorship of 529 plans by
governmental entities. 529 plans issue municipal securities,
which generally exempt the plans and their issuers from the
rules that apply to similar investment products.
This means that participants in 529 plans are deprived of
the benefits not only of fee disclosure rules but also a number
of other rules that, in the private sector, have the effect of
promoting competition or otherwise limiting fees. For example,
mutual fund sales charges are subject to set limits; 529 plan
sales charges are not. Mutual fund shareholders generally have
the right to have their contributions invested and redeemed
immediately at the fund's per share net asset value; 529 plan
participants do not have these rights. Fund share holders have
the right to vote on key fee increases; 529 plan participants
do not. Fund shareholders can recover excessive fees in court;
529 plan participants cannot. Each of these mutual fund rules
directly or indirectly limits fund fees, but these rules do not
apply to 529 plans.
Furthermore, the State sponsorship of 529 plans creates
conflicts of interests that generally are not present in the
private sector, and these conflicts of interest may result in
higher fees. States may set fees or hire managers based on
political considerations rather than the effect on
participants' interests. In one case, a State treasurer
purportedly used 529 plan assets to run ads about the plan that
prominently featured the treasurer, who was running for
reelection. States, as a group, have a monopoly over the
Federal tax benefits provided by 529 plans. And each State
individually has a monopoly over that State's tax benefits.
These monopolies further reduce price competition and increase
costs.
State sponsorship of 529 plans means that there are 50
different sets of rules, thereby increasing costs for providers
which they pass on to participants in the form of higher fees.
Establishing one set of rules would reduce costs.
The absence of nondisclosure rules that promote competition
and limit fees, States' conflicts of interest, the State's
monopoly over plan tax benefits, the added compliance costs of
50 different sets of rules all argue for more aggressive fee
disclosure requirements than in other contexts.
This is not to say that, if such rules are not adopted, all
529 plans would charge excessive fees. There are States that
offer low-cost plans with reasonably clear although not
standardized fee disclosure such as we have heard Georgia's
plan described as well as Virginia's and Ohio's in today's
hearing, and they are likely to continue doing so with or
without new rules.
But this is not true of all States, and tailoring fee
disclosure to the Vanguards of the 529 plan industry makes no
more sense in the 529 plan context than it would in the private
sector.
529 plan fee disclosure must be designed with a view to the
sponsors, the States, for which mutual fund-like disclosure
rules will not be enough to make them sufficiently accountable
to market forces and insure that 529 plans serve their
congressional purpose.
Another subject about which there may be some disagreement
is who should promulgate and enforce rules for 529 plan fee
disclosure. I believe that the SEC has unparalleled expertise
and experience in developing fee disclosure rules. It also has
the objectivity and independence, as noted by Professor Olivas,
which the States lack that is necessary to interpret and
enforce these rules. I would recommend that Congress authorize
the Commission to enforce and enforce fee disclosure rules for
529 plans.
Also I want to specifically address the idea that Chairman
Baker raised about an SRO and note that we just heard, for
example, Ms. Williams talk about the standardization, and it is
important, but immediately caveated that with the statement
that Ohio must be able to shape and define its own plan to meet
its own needs. And I think that we must wonder, when we hear
that statement, whether for some States, perhaps not Ohio, that
is going to mean that they will want to go their own way
regardless of what standard arrangements that Ms. Cantor may
reach.
Another thing to think about is in the creation of this SRO
you have created a brand new regulatory entity that doesn't
currently exist. We already have banks and the IRS regulating
IRAs. We have the Department of Labor regulating employee
benefit plans. We have got the SEC regulating variable
annuities. And query whether you want to have a new regulator
with a whole new set of rules, one that is now answerable to
possibly 50 different interpretations of those rules to
administer this new securities product.
And another thing to think about is this issue will not
stop with the disclosure of fees. It will go on to disclosure
of performance and performance and standards, as Mr. McNeela
just mentioned. It will go on to the issue of whether there
should be limits on loads, as soon as some broker dealer
exceeds the NASD loads on the ground as permitted under MSRB
interpretations that they are providing additional services.
There will be further debates about what substantive
investments are made in 529 plans. What is going to happen the
first time that a State decides to invest in companies in-state
in order to help that State's economy? What is going to happen
when the first state offers an Internet fund, the equivalent of
an Internet fund in 2006 and somebody sees 40 percent of the
investments that they made for their kids' education go down
the tubes in 1 year as we know can happen? These are the things
that are going to have to be dealt with sequentially by a new
SRO. And the irony of this is of course that we have been here
before. With the National Securities Markets Improvements Act
it was precisely the inability of the states to standardize
disclosure requirements that they were applying to mutual funds
that caused Congress to enforce that standardization.
And I believe that that has been a great boon for the
industry. It is simply inconsistent with the concept of
Federalism that we would could expect States to get together
and rigorously enforce standards that would apply to all of
them or, in fact, none of you would need to be here. The States
could simply do that on their own.
So as you can see, I have a bit of skepticism generally
about State actors and the private sector, and particularly as
Professor Olivas mentioned, having those State actors in the
private sector regulate themselves.
So in conclusion, despite the inadequate state of the 529
plan fee disclosure, this product is still relatively in its
infancy and regulators have a real opportunity to get it right
from the start. We know how good fee disclosure promotes
competition, reduces fees and creates wealth. And in this case
that additional wealth creation will go to the worthy cause of
higher education. I would be happy to help with the answers to
any questions if you have them.
Chairman Baker. Thank you, sir.
[The prepared statement of Mercer E. Bullard can be found
on page 47 in the appendix.]
Chairman Baker. Ms. Cantor, I would start with just the
obvious, since the product is relatively new, there are still
many parents learning about it and the dramatic growth we see
over the past 3 years, perhaps is just a very modest indicator
of what the future may hold with regard to national
participation. That, in itself, would make congressional
interest even more sensitive to appropriate management
standards of disclosure and transparency. Given the fact that
the network recently adopted a draft of principles, what would
be your expectation as to a final accord being formally adopted
that would be able to be reviewed by the public and Members of
Congress as well? Is there a time line? Or what is your
expectation?
Ms. Cantor. Thank you for that question, Mr. Chairman.
Regarding the process that we would like to continue with the
guidelines that we promulgated and adopted last week, which, by
the way, were a joint partnership effort between the public and
the private sectors, our next step, as we promised the SEC task
force, is to sit down with them under Chairman Oxley's
direction to have them review with us the guidelines, get their
input, work with your staff here on financial services who have
a copy of the guidelines. It is a work in progress.
There are still States and their counsels who are making
comments and making suggestions. We welcome all opportunities
for input. We are hopeful that in the next several weeks over
the summer months we will be able to work with our partners and
with the regulators to provide a comprehensive set of
guidelines that we look to provide to the members of Congress.
Chairman Baker. With regard to similar efforts in other
related matters, in the insurance world, we have 50-plus
different regulatory structures, with varying degrees of
enforcement authorities within the various States. And we have
been working with the NAIC and others to try to reach some
national standard to allow for more uniform sales practices and
enforcement capabilities. And that has gone on for some number
of years. And we are really, although having made some modest
progress, we are not very close to the goal which many members
of the committee would support.
And that is the reason for suggesting that if you reached
accord on a model standard of disclosure, as for example, and
had perhaps a product or two in response to Mr. Olivas'
concerns about having too many choices for the confused average
consumer, if you had a standard national product that all
States would offer that could be compared A to B to C, and if
the State complied with all of the model requirements which
your network would adopt in consultation with the SEC, that
could then lead the State to earn a nationally recognized
standard of conduct, for example.
I really view that almost as the minimal sort of step that
could be taken to avert where we don't want to go, and that is
ultimately some Federal intervention to set a model up. I
really like the idea that innovative people come up with
products that meet consumer needs. In some States, there are
much higher per capita income than others. Smart people are
going to go wherever they can to make money for their children.
And we can't keep people from investing where they think best
for their own future.
So merely the fact you offer more products is not a bad
thing. But having some measure of comparability so people
understand what they are buying when they are not the
sophisticated investor, I think, is the general concern.
Because this is the roadway out for many young people to become
those sophisticated investors, and we certainly want to make
sure that average working families can make clear choices based
on comparability. Given the fact we don't really have a firm
time line, could we expect something within a year or two as to
a final product? Without boxing yourself in unreasonably, how
long a clock would one expect the Congress to wait while the
self-regulatory process works?
Ms. Cantor. I would be hopeful that by the end of this
calendar year we would be able to have something well within--
by the end of 2004 should not be an issue to present something
to Congress. And again, you know, asking the support of your
staff to work with us along the way would be most helpful in
moving forward some ideas that would be, you know, optimal in
your opinion.
The one thing that I always do want to mention, and I
always use especially the example of your own plan in the State
of Louisiana, where your State has crafted a program
specifically for Louisiana residents that they feel, you know,
best suits the citizens there, which is an amazing type of
matching program into the 529 plans where certain States that
have put in incredible benefits for their own citizens based
upon their own needs. We have to make sure that we encompass
the individuality of some of those plans into a structure that
would be a model guide line.
And so that is what we are working to do. We will seek the
input of every single State administrator in the country to
make sure that we understand the complexities of their
programs. We have been able to get the guidelines put together
in a relatively short amount of time. So I am hopeful with the
support of the SEC task force, and again with your staff, we
will be able to move pretty quickly.
Chairman Baker. I think the last piece of that and my
time's expired, is the idea of a single product that could be
offered everywhere so you could have clear concise
comparability on a very limited--a very safe, an S&P index kind
of not actively managed fund, so someone could pick that up and
look at Mississippi or Louisiana or Texas and say, well, my
State's doing pretty well or I am okay with this little extra
charge because of--I think it is a little daunting when you sit
down and try to go through 12, 13 plans and really figure out
what that means to you 15 years hence. Particularly, when, if
it is a basket of underlying mutual funds where you really
don't know the managerial costs associated with that mutual
fund nor how to calculate it for those 12 or 15 funds. But I
appreciate that. And let me move on.
Mr. Baca, did you have questions?
Mr. Baca. Yes. Thank you very much, Mr. Chairman. And thank
you panelists for being here and discussing the 529 plans. My
particular question is who knows about the 529 plans. This is
part of the problem that we have right now I know that there
are 22 States and the District of Columbia that provide State
tax deductions to residents who invest in 529s. What are the 22
States and why aren't other States participating?
Ms. Cantor. Is that question for me, sir?
Mr. Baca. Any one of you can answer that.
Ms. Cantor. I think the issue of who is providing a State
tax advantage goes back to the creation of these plans at every
State legislature, and so there are several States, as you
know, around the country who don't have a State income tax
structure, which is why you don't see, you know, Florida and
Texas for example offering any State tax advantage. That is
where you start to see some of the disparity in 529 plans
which, if you go back to the beginning, are mutual fund
securities. So at the base level, these are like municipal
securities that the States are issuing with their partners in
the financial services industry. And that is where you find
some of the different State tax treatment. As far as who knows
about these plans, you know, it is a huge effort on behalf of
the States to work with their partners to perhaps make
marketing decisions that may not be made just in the private
sector.
It is a goal I know of the States of Ohio and Virginia, in
particular, to reach those middle income and lower income
families who get lost in the shuffle, not, you know, poor
enough for financial aid, if you will, but nowhere near being
able to meet the cost of higher education. We conduct marketing
campaigns that maybe traditionally would not be a great
marketing decision. They are questions that Ms. Williams and I
face every day from our State legislators when we testify
during our legislative session some of the first questions we
get are how are you reaching all Virginia families and all Ohio
families.
So we make extreme efforts to make sure that we are
reaching all families in our States, and I know the other
States around the country are doing the same in these
partnerships that are truly unique. But the differences between
the State tax legislations typically come from the creations of
these plans and the amendments that legislatures are able to
do. And as was mentioned, I think, by one of the panelists that
sometimes State budget issues, today is truly the reason why
you are finding, you know, hesitancies or the lack of any type
of State tax additional benefit added on to these plans. I
believe in the future you will see more and more of that as our
economy continues to recover.
Mr. Baca. So what you are saying is that each State has to
create its own plan. As we look at standardization, there are
certain States that are not participating and in order for them
to do that they have to develop their own plans, correct?
Ms. Williams. Well, every State----
Mr. Baca. Or approval from the State legislators.
Ms. Williams. Yes. These are statutorily based typically
because they need to be sponsored by States. They can also be
sponsored by higher education institutions, but they generally
have been created by statute and every State now offers 529
plans. Only 22 states choose to offer a tax deduction in
combination with their plan. So that is the difference. Some
States choose to offer a tax deduction and others do not. And I
think it is very seriously connected with what the particular
goals of that State are.
In Ohio, we have a goal to significantly increase the
number of people who are actually attending colleges in our
State. We have traditionally been a manufacturing economy and
now we have a significant need to increase the number of people
who are going to attend college in our State. And our State has
felt that it was important to associate tax benefits with these
kinds of savings, so I think that is the variability that does
occur between different States.
Mr. Baca. I see that as very important, especially as I see
the State of California increasing its tuition fees. Many of
these students cannot even go to a State college or university.
They will be going to our community colleges, so I see the need
for these kind of plans and others. But what percentage of
those in the plans are Hispanics? What kind of marketing tools
do we have reaching out to Hispanics? We represent 16 percent
of the total population of the United States, 42 million people
right now, 700 billion in purchasing power.
So when you look at having access to community and to State
colleges and universities, what is currently in plan in terms
of marketing? Do you have any statistics or data that shows
what percentage of people participating in the plan are
Hispanics, Blacks, or Native Americans?
Ms. Williams. I can try to answer that. Although we try to
collect those kinds of statistics, typically that information
is discretionary, as is income. So what we typically find out
is that people don't generally report that kind of information
to us since it is voluntary. In the case of Ohio, we have a
staff of 35 people and we have five marketing reps who are--who
actually work out of their homes and live in various regions of
the State. And their job, despite the fact that our product is
sold through financial advisors, is to market the product
through public events such as baby festivals and ethnic fairs.
We also send a newsletter out to every elementary school
student in our entire State which they take home to their
families. We----
Mr. Baca. So are you saying then that in reality, maybe we
are not even targeting Hispanics since that information isn't
even provided?
Ms. Williams. I don't think that is true. I know that we
target every----
Mr. Baca. It is up to the plans to target Hispanics, to
make them aware that this is even available for them. I would
have loved to have participated in these plans. I have a child
that is going to go to a university next year.
Ms. Williams. Well, I can only speak for our State, and I
know that we have an extensive effort to target every single
ethnic group in our entire State. We work through churches
and----
Mr. Baca. But you don't have a percentage so we don't
really know what percentage are actually targeted.
Ms. Williams. Unfortunately I don't have a statistic.
Mr. Baca. So then we need to make sure that as we look at
the work in progress and the model that is going to be used
that we develop a good marketing plan that reaches out to our
communities, to make sure that they are also eligible to
participate or want to participate.
Ms. Cantor. Congressman Baca also, California for instance
has a Spanish Web site that contains the information.
Mr. Baca. Yeah. But not everybody has a computer in
California. That is nice.
Ms. Cantor. Right. I do know also that several States, I
know in our home State here in Virginia, we issue our materials
that go to every student in the State is available in Spanish.
If anyone calls our lines at the State agency, we have Spanish
speaking employees who deal with the Hispanic population. We
have targeted marketing campaigns every year to reach the
Hispanic minority community and the African American community
and the Asian community. So it is a big push on behalf of the
States that contain, you know, ethnic populations that--I know
it is a huge push in Texas. The commercials are in Spanish. And
I think that there has been greater and greater success in
reaching communities by speaking a language that everybody can
understand. I know the National Association of State Treasurers
has Spanish educational Web sites also available that you can
access at the public libraries, and I do know about the----
Mr. Baca. But you have got to be aware that these plans
exist, because if not, then they can't access them. Miguel, it
seems like you wanted to say something.
Mr. Olivas. Well, only that I am a native Spanish speaker
and let me just tell you my confusion is not ameliorated by
reading these things in Spanish, nor would it be if I were a
Vietnamese speaker. Let me tell you the problem is not
necessarily translating these materials into Spanish or other
languages. Native English speakers cannot make sense of many of
these materials, let me just say. If you try, if you ever
bought for your daughter a telephone plan, a portable telephone
and then multiply that times 10 and try and find out how she is
going to use it for 18 years, and put down a lump sum or try
and invest; are approximating that kind of complexity.
And I am not certain that the answer is simply publishing
it in more languages, although I think that the States, to
their credit, have actually marketed these things very well. To
me the question isn't that we are not marketing these things
well enough. The question is how much information all users
have, whether bilingual or whether native English speakers or
native Spanish speakers or Hmong speakers. The question isn't
whether one can go to a Web site that is bilingual.
The question, in my view, is whether or not you can make
sense of that and whether or not you have confidence that the
program is still going to be there. And I would have expected
some convergence of these plans. Because some of these plans
are actually being enacted at various States by national
players who draft these plans and simply in some instances have
turn keys in some of these States.
In an article I wrote on my native State of New Mexico, it
is pretty clear to me that there is not much New Mexican-ness
to that plan, which is done by a program that doesn't exist in
New Mexico, except in this form. It is headquartered outside of
New Mexico and it simply rents space in New Mexico to enable
its plan to be enacted there.
[speaking Spanish.]
Chairman Baker. Mr. Baca, I need to move on to Mr. Tiberi,
if I may. We will come back with another round.
Mr. Tiberi.
Mr. Tiberi. Thank you, Mr. Chairman. I was hoping we could
maybe get an Italian plan in Ohio. Ms. Williams, the Ohio plan
which was established in 1989 before I went to the legislature
is a fabulous plan. As a participant now, as a father, I want
to compliment the leadership that you have provided. I wish
that we would have had a plan sooner, so I could have taken
advantage of it as a college student. In your written
testimony, you mention that in Ohio, we have recently gone
through an overhaul of materials, since we are talking about
marketing, that is put in place to try to simplify fee
disclosure. Can you describe to us what fees are disclosed and
where the fees are disclosed in this marketing material.
Ms. Williams. Sure, I will be glad to, Congressman. We
completely overhauled our entire offering materials and we have
a one-page document now in our offering statement which shows
all the over 30 options that we offer, exactly what the program
fees and expenses are. It shows the fee that our agency
collects in order to help administer the funds. It also shows
the underlying fund fee and the total annual expense ratio. So
we have laid it out on one page. We have also taken great pains
to create a new document that is a risk tolerance questionnaire
that we have made available to an individual who is walking
through the product.
And it is a series of a few questions that help that
individual to identify what kind of saver they are, what kind
of risk tolerance they take. And then consequently, they can
look at the list of our products and determine what products
might be in their own best interest.
So this is the start of a process to be much more clear and
consumer friendly, in order to enable people to be able to make
the best possible decisions for their families.
Mr. Tiberi. For participants in Ohio, in addition to the
tax benefits that you spoke of in your testimony, what other
benefits are there for participants from an Ohio perspective?
Ms. Williams. Well, we work with Ohio employers, for
example. We work with almost 2000 Ohio employers to allow
people to contribute through the workplace. We actually go on-
site. We market, we talk to people at their place of
employment. We have no annual fee for Ohio residents for this
plan. There is no enrollment fee for this program at all. We
try to make this program available and accessible everywhere.
We do targeted radio advertising. We do print advertising
because we want every single child in our State who aspires to
go to college to have some ability to save through this
program. And while we know it won't cover the cost for most
people, we think it is important that there are some resources
available since the cost of college has at our public
universities in Ohio has gone up 50 percent in 4 years.
Mr. Tiberi. From your perspective, since 1999, when you
became the administrator of the Ohio program, what has been the
most common complaint from participants/investors?
Ms. Williams. It varies as our program has changed. You
know, we have heard complaints about fees, we have heard
complaints about accessibility. The biggest complaint was we
had a 1-year moratorium on new contributions to our prepaid
plan, which ends the end of this year. And the biggest
complaint has been that that program is no longer available.
And the reason being we simply could not keep up with the costs
of rising tuition at our State universities. So it was a very
difficult decision for us to make.
But that has been the biggest complaint in the entire time
that I have been there. But we listen very carefully to our
customers. We offer an 800 number. We communicate with them by
the Web. And we really take into consideration their needs and
desires and try to craft our plan in order to meet those.
Mr. Tiberi. Thank you. One last question for Ms. Cantor.
What do you think from where you sit nationally, of dollar cost
disclosures percentage cost disclosures and how does the
college savings plan work draft deal with those two issues?
Ms. Cantor. I think those are part of the guidelines that
you will see. I think they are important. It enables, you know,
families to sit down at their kitchen table and understand the
types of dollars that will be coming out of whatever they are
earning. So those are definitely a part of what we are looking
at in the tables that will be disclosed in the future, and so I
am hopeful that that will aid the transparency and the
disclosure across the country of what will be taking place.
Mr. Tiberi. And most administrators agree with that, from
your knowledge?
Ms. Cantor. I think that the commitment of our industry and
all the stakeholders to participate in the process has been
unanimous. Nobody wants to be the one plan that stands out and
is covered in the financial press as the worst program because
the beauty about the plans is not only do the States have the
sensitivity politically and otherwise to react quickly to the
concerns of our constituencies, but we are also very sensitive
to the attention that is paid to this and the reputation. The
last thing you want is your State legislature or your governor
to ask you why you are the only State that doesn't suit a model
or doesn't have a qualification status or you know a gold
standard or something. So I think we are very sensitive to
that. It is not probably in the terms of private competition
but more of our ability as State administrators to hold up our
plans as models across the country so that we make our
constituents happy.
Mr. Tiberi. Thank you.
Chairman Baker. Thank the gentleman.
Mr. Meeks.
Mr. Meeks. Thank you, Mr. Chairman. And let me just--I will
just throw out a couple of questions and just anyone can
answer. Hopefully, and I apologize if they were asked already.
But you know, having a 4-year old daughter myself, I am doing
some of this college planning and so I want to make sure, and
let me just ask, are there 529 plans whose fees are so high
that they would negate the tax benefits of investing in the
plan? That will be my first question.
Mr. Lackritz. Congressman Meeks, maybe I can address that.
I know in the letter that Chairman Donaldson sent back to
Chairman Oxley in response to the concerns about 529 plans, he
raised the possibility that there could be fees that would be
so high that they would, in fact, eliminate the tax benefit
that would inure as a result of the plan. In reality, I think
that is highly unlikely for a number of different reasons. But
it is important from the standpoint that the fee structure--the
different fees that advisors charge or that broker dealers
charge when they sell these plans provide for a number of
different services, levels of services that the plans provide.
The key, I think, is to make sure that the disclosure is clear,
that we increase competition by getting State tax parity across
the board and encouraging more competition here and make sure
the disclosure is fair open and let the marketplace and
competition drive fees down so that they are as low as possible
for everybody involved.
Mr. Meeks. Okay. Well, and I know the plans, you know you
talk about the fees, and you are shaking your head no. No, I
thought you were shaking your head no.
Mr. Olivas. It was an inadvertent twitch.
Mr. Meeks. Oh, okay. Since 529 plans became law in 1996, do
we have affirmative evidence I would say that they have truly
been effective in helping parents save money for their
children's college education, or is it still too early, we
don't have enough of a test.
Mr. Olivas. Well, there is some scholarship, and I
recommend it as a cure to insomnia for the most part.
Economists have begun to turn their attention to this, and I
think that there is no evidence yet that there has been
substantial diversion into these plans by people who would not
have otherwise done so. This is the hard part to measure. Many
of the people who participate in my estimation are people who
already had the proclivity to do so and are seeking instead of
putting money into a coupon bond or some other investment
vehicle, are trying these particularly whether there used to be
full faith and credit for the prepaid plans that would
guarantee no matter how much the cost went up it would be
covered. But that, of course, is just a small number of States.
And as was suggested earlier, as indicated earlier, Ohio
and others have put those on hold. Of course, they will still
pay off to the participants, but they aren't taking any
newcomers. And so you had to be first there. Well, I simply ask
who was always going to be first? It was going to be the most
advantaged, the wealthiest and, in many cases, people who
instead of putting money into other investments simply took
this route. And so while I think that there is not definitive
scholarship, I believe that this is intuitively obvious in the
participation rates.
Mr. Bullard. If I could add to that. To answer both your
questions, it really goes to the way to think about 529 plans.
If you think about them as an alternative to investing in a
taxable account, then the question of whether the fees could
erode the tax benefits is really a question of whether you
would pay more in the 529 plan than you would otherwise pay in
a taxable account.
And in my testimony, I have suggested some reasons why that
might be the case. But more importantly, I think that is the
way to look at it. And simply the fact that there are high cost
529 plans doesn't mean that they are destroying the tax
benefit. They are simply reflecting the fact that we have high
cost taxable account options. And we are also reflecting the
fact that there are people who live in that marketing channel,
and whether they buy the 529 plan or buy in the taxable
account, they are going to pay high expenses. And that is not
so much a 529 plan issue as an issue generally about the fees
that people pay and decisions they make about using
intermediaries for the most part.
Mr. Meeks. So I guess the word is still out then, or the
decision is still out as to whether or not--but obviously
people who are lower income, whether they benefit from the
these 529s because they don't have the disposable income to
invest in these 529s in the first place, and then whether or
not there are benefits to them, you know, as it results to the
deductions in the respective States. Yes, ma'am.
Ms. Cantor. Congressman Meeks, I would invite all the
panelists and anyone else to listen in on some of our phone
calls that we get back at the State agency and the visits that
we have from police officers and teachers and first time
students who are attending college as the first member of their
generation to go to college about the family by family contacts
that we have of who we are reaching and helping. And what we
really like to stress, and what we have seen across our State,
and I am sure is replicated across the country is the powerful
message that these plans are sending to American families, that
a higher education is not only worth saving for, but in many
instances for families it is worth budgeting for and worth
sacrificing for.
We get dozens and dozens of requests to send certificates
from grandparents who are putting in $20 a month so that their
grandchildren know that they have a future ahead of them to go
to community college, to work as hard as they can on their
grades because their parents are putting away some money every
month. So although some of the focus today has been on the fee
structures and disclosures and mutual fund investors, we really
work with the families on a day-to-day basis and those families
who may not have seen investing as something they wanted to do,
and possibly having the State involved gives the family some
extra security, that they can call up the State office, they
can call their State legislator, they can call the Governor's
Office if they have a problem if they are not getting service
that they should demand and require from our programs.
So I am hopeful that you know more and moreover time, I
know we are reaching them you know today. I am hopeful and our
goal is in our States to continue to reach more of the
population that would not necessarily be saving today. And you
will find much are our marketing materials directed to that
end.
Chairman Baker. The gentleman's time has expired. Thank the
gentleman.
Ms. Biggert.
Mrs. Biggert. Thank you Mr. Chairman. This has been a very
interesting hearing. I wish that I had known about this when I
had three children in college at once, but it was before the
time of this, so maybe my grandchildren will benefit from this.
Mr. Lackritz, you mentioned in your written testimony
something about the Coverdell Education Savings Accounts. Are
those competing at all with these 529s?
Mr. Lackritz. Well, Congresswoman Biggert, in a way they
are competitive because they are a savings vehicle for higher
education. But the restrictions, the income limitations and the
restriction on contributions is such that they, you know they
are limited in contribution and deduction to $2,000 a year, and
there are income limitations on eligibility as well so they are
far more restricted and as a result participation is not nearly
as wide. 529 plans really, going back to Congressman Meeks'
question, 529 plans are a terrific for federalism here.
The innovation, experimentation and pioneering work of the
States, coupled with the active effort at the Federal level
have produced a remarkably successful plan. I mean in 3 years,
the penetration rate in 529 plans has gone up to, I think it is
8 percent now over 4 million households and over $40 billion
invested in these plans. I would suggest, the awareness of
saving for education has increased significantly because of
these plans. So all of that is to say, I think the 529 plan,
the Coverdell Savings Accounts, educational savings accounts
are another vehicle but they are much more restricted.
Mrs. Biggert. So they probably are not used as much or is
that just because they--of the education. Which leads me to my
next question. Could you just discuss in more detail the
investor education programs? This is one of your brochures, I
think that----
Mr. Lackritz. Well, I am glad you got it. I was going to
hold it up for people in case they were interested. We have an
extensive investor education Web site. It is called
www.pathtoinvesting.org, and it has sort of best of class
investment advice. There is no selling of products or services
specifically on the site. It is designed to help people
understand the basics of saving and investing for the future.
It also provides a site for individuals that are getting
into the market for the first time to participate in a
hypothetical investment exercise where they can take a
hypothetical $100,000 and invest that and sort of see what
happens before they actually risk any of their own money. In
addition, we have a number of different publications. Your
guide to understanding investing is our sort of flagship
publication which is put out by the same people and authored by
the same people as using your guide to understanding 529 plans.
Mrs. Biggert. What feedback have you gotten from investors
about the programs or about the education program?
Mr. Lackritz. It is interesting. They seem to like the
information we are providing and they want more. It is almost
like a public good. I mean, whatever we produce, they like it
and they want more. So we are continuing to put out more
guides, more help in different areas for investors to help
educate them as much as possible.
Mrs. Biggert. Do you think that the States should adopt
their own investor education programs or just rely on yours?
Mr. Lackritz. I would defer to the States on that. I think
that we have terrific material and I think given the fact that
our firms are expert and have great expertise in the capital
markets and in helping individual investors invest for the
future I think these are terrific program materials. We would
make them available to States if States wanted to use them.
Mrs. Biggert. Do many of the States use them or is it
just----
Mr. Lackritz. Not yet. What we try do is to link our
investor education Web site as broadly as possible and as
widely as possible, and we have got a number of links to
other--for example, the Treasury now has an investor education
financial literacy office specifically devoted to this. We are
getting linked to that. We are getting linked to the SECs
investor education Web site. We get linked to other Web sites
as well.
Mrs. Biggert. Thank you. Maybe this would be to Ms.
Williams or to Ms. Cantor. Mr. McNeela proposed in his written
testimony that only States that don't discriminate against out-
of-State plans, in other words, States that don't penalize for
withdrawals from out-of-State plans deserve to have their plans
defined as a qualified tuition tax savings plan and only those
plans then would presumably receive all of the Federal tax
benefits. What do you think of this proposal?
Ms. Cantor. I think we go back to the beginning as we
usually do, to get a good answer. These, again, Congresswoman
Biggert are municipal fund securities. They are no different
from a taxation basis in general from municipal bonds that are
issued by a State. If somebody lives in the Commonwealth of
Virginia and owns an Illinois general obligation bond, they are
going to pay Virginia taxes on the earnings of that security.
There may be some States that give an additional benefit
and maybe conform to the Federal tax exemption, but I think it
is the prerogative of the States. I think that the focus of our
industry really needs to be on the permanency of our Federal
tax exemption. I think that is the one chilling effect that we
are seeing out there for families, because in the interest of
full disclosure, which it seems we do on every page, we are
constantly reminding our investors that our Federal tax
exemption does expire unless it is extended or put into
permanency by 2010. And before we blink, as we all know as
parents, 2010 will be here. And so that is something that we
hope to work very hard with all of you on to help that chilling
effect that is going on.
We even hear some financial advisors that have national
showcases to communicate saying, well, maybe you shouldn't put
your money in a 529 plan because the Federal tax exemption will
disappear and people think the program is going to disappear.
Just to reiterate about our education initiatives, all the
States have extensive, you know education initiatives. Not only
do we partner internally with the State higher education
authorities, the State Treasury Departments on all their
financial literacy awareness activities, we also partner with
the securities industry association and other member
associations to offer those materials.
We have them available to us. SIA has made those books
available to all the States. We bring them to the PTA meetings.
We bring them to our church meetings and so we make sure that
families who want general information use the best materials
out there. We also are able to model a lot of our own materials
on good ideas to communicate more effectively. So I am hopeful
again as time goes on, this is still a new industry at some
level. We may not be newborn, but we are certainly toddlers,
you know, toddling around and trying to grow to the next step.
We are going to do the best we can to there in a strong and a
consistent way.
Mrs. Biggert. Thank you. Thank you, Mr. Chairman.
Chairman Baker. Thank the gentlelady. Mr. Sherman.
Mr. Sherman. Yes, Mr. Chairman I am going to take up so
much of the committees' time tomorrow that I am going to keep
my comments to just 1 minute.
Chairman Baker. Oh, thank you.
Mr. Sherman. And that is to echo what Ms. Cantor said and
that is we ought to call on the Ways and Means committee to
either make this a permanent program, or not. But the phony tax
budgeting where they put in a program that they intend to have
permanent, but then they put in the law that it is going to
expire, and then they wait a couple of years then they extend
it creates a circumstance where it costs the Federal Treasury
every bit as much as if the program was permanent, but the
effect on encouraging people, whether it is these 529s, or
whether it is the research and development credit which I
realize is outside this hearing, but they come up with things
they want to encourage that are long term plans, then they
provide a tax credit that is going to expire in a few years and
then they extend it with the effect that they get all the costs
and only some of the encouragement. And I will yield back.
Chairman Baker. Do you want to yield to Mr. Baca or to
yield back?
Mr. Sherman. Actually I will yield to Mr. Baca. I thought
he would be next.
Mr. Baca. Thank you very much for yielding to me. And I
want to continue with the questioning that I addressed before.
And I do appreciate the fact that we are addressing this issue
because I think it is very important. This administration is
actually cutting back additional funding for education,
especially higher ed, the PALS Program and other programs. The
States are also cutting back funding for our higher education
institutions, our State colleges and universities. Is there a
disparity in terms of the returns between a moderate-income
person who pays X amount of dollars, who buys into the 529,
plan versus those with low incomes?
Mr. Bullard. The return on the investments will be the
same. It will be on a pro rata basis based on the amount of the
account as I understand virtually all of the plans. But another
way of looking at that question is with respect to fees and one
of the interesting aspects of these plans is that when you have
an asset based fee, what you really have is a structure whereby
the larger accounts are in fact subsidizing the smaller
accounts.
So with respect to mutual funds and other aspects of the
plans where there is an asset based fee, for example, one
percent of assets a $100,000 account is paying $1,000 a year.
The $1,000 account is paying only $10 a year and the $100,000
account is in effect subsidizing the smaller account. So this
has always been a characteristic of the mutual fund industry
but is essentially a kind of progressive pricing structure.
Mr. Baca. Right. That is why Chairman Oxley, in his opening
statement, was concerned with the disparity of the fees and I
was just asking why. Mr. Olivas?
Mr. Olivas. Well, I think that he was actually talking
about a different matter, and I think that was the extent to
which fees erode either the corpus or the return. I do think
that people who have prepaid options or who pay a small amount
per month, which I encourage, and the reason that I have
encouraged these plans over the years is because I do think
that the psychological encouragement of people to invest in
their children and their grandchildren's education is
paramount, and I have been willing, in many instances, to let
the wealthy be advantaged even more because I think that it
pulled along smaller investors as well, and I think that that
is extremely important.
But I think that your question is do poor people get back
as much as wealthy people, and that is always going to depend
upon their tax situation. These are structured frankly for
wealthy people. Poor people don't have as much to put in and
don't have as much to shelter. And they participate accordingly
in higher education. I think that these are largely a refuge of
the wealthy. I think that the data, no matter how they are cut
and no matter how many picnics these are sold at, essentially
the wealthy participate. I think that that is simply a cost--we
are always going to have the poor among us. I mean, to some
extent, we are always going to have that disparity.
Mr. Baca. That is why I am very much concerned with the
outreach that is going on. We talked about the Internet and you
mentioned earlier that even bi-lingual information doesn't
increase access. So we need to continue to develop further
outreach in terms of our communities. You mention, the PTA and
the churches, but there are a lot of other organizations as
well. Are we tapping those organizations in terms of
availability of information of the 529 plans, so that people
within our communities can invest?
But we want to make sure that people have access and
opportunity to go on and not be denied because they can't
afford to go to a State college or university. That is why I
also agree with you in reference to standardization. Disclosure
needs to be increased as well. And I do agree with my
colleagues. So we must market to Hispanics and other groups who
want to go to college.
Hopefully we come up with some form of a plan that can
standardize the 529 plans and provide more of an opportunity to
reach out to our communities.
Chairman Baker. The gentleman's time has expired. And I
want to get the other two gentlemen in. I am informed we are
going to have a series of votes here shortly afternoon. Mr.
Clay, I think you wanted to----
Mr. Clay. Thank you Mr. Chairman. I will be brief. I am not
sure which witness can answer it. But President Bush has
proposed an alternative savings option, the Lifetime Savings
Account. There are concerns that LSAs would be in competition
with 529 college tuition plans because the LSAs could be used
penalty free for uses other than education. Can LSAs be
designed in a manner that could coexist with 529 plans without
siphoning off their investors? We do not have enough investment
dollars in this country and we need more programs to induce
savings. Why make them competitive? And can this be done? And
if somebody could attempt to answer.
Ms. Williams. Representative, in my view, they would be
difficult to coexist. I do think that if LSAs were created that
they would siphon off savings that have accrued to 529 plans.
And I think specifically of States like Ohio, which have added
tax benefits to these plans, and I think that it would be a
critical issue, which we would have some difficulty with
because if we are going to provide some kind of Federal and
other State tax advantage, it needs to accrue to a higher
purpose than allowing people potentially to use savings
accounts potentially for higher purposes, but maybe to buy a
new wardrobe or for other such purposes. So I think it would be
detrimental to 529s.
Mr. Clay. Yes, sir.
Mr. Lackritz. Yes, Congressman, I would just--I would
respectfully differ a bit from Ms. Williams' response. We think
it is really important to increase the level of savings in this
country overall. And we favor any kind of measures that would
help to increase overall savings. We think that the Lifetime
Savings Accounts are more of a fundamental tax reform frankly
than they are a specific account designed specifically for a
particular purpose.
They also would not enjoy State tax benefits in the same
way that 529s are, so we would favor the creation of lifetime
savings accounts. I think that would be a complement in many
respects to what is being provided now by the 529s.
Mr. Clay. So you think that the two plans could coexist?
Mr. Lackritz. Absolutely.
Mr. Clay. Thank you. How do we evaluate 529 plans when
there is not sufficient information because of lack of
disclosures to compare plans? What do you suggest we do to get
the proper transparency needed for investors to make the best
choice of investment plans, or do we need more enforcement? Or
are sufficient resources in place already?
Ms. Williams.
Ms. Williams. I think that the voluntary disclosure
principles which the college savings plans network developed is
a huge and important step to take us in this direction. I think
the States have a vested interest in ensuring that their State
plan represents them favorably in terms of the information that
is provided. It is, in no State's best interest, to provide
information regarding a program that is confusing and difficult
to understand.
So I think--and knowing from our perspective we are
expending significant resources, time, money and attention, to
talk to the public in order to make sure that we are disclosing
everything that we need to legally, that we are making it very,
very clear, very easy to understand, and I know from talking to
my colleagues, that that is their goal as well. It is to help
people make these important decisions, not to create confusion.
Mr. Bullard. Congressman, just to--I would have to
disagree. History tells us that voluntary standards will not
work. These programs have been offered for more than a decade,
and what Ms. Williams has to say about the States not, you
know, being in their interest to provide good disclosure has
been true for that entire 10, 12-year period, yet they have not
provided that disclosure. Without a strong enforcement
mechanism, without an experienced regulator who can
independently establish those standards, I think it is simply
unrealistic to believe that this program will work when we have
seen this kind of approach fail in the context of State
regulation year after year after year with respect to
securities products.
Mr. Clay. Thank you for your response. I yield back the
balance of my time.
Chairman Baker. I thank the gentleman. Mr. Emanuel.
Mr. Emanuel. Thank you, Chairman Baker, and thank you for
holding this hearing. As you know, college costs went up 11
percent last year and 14 percent this year alone. And the truth
is the most important thing you can get in life besides the
love of your parents is a college education, and none of us
would be in this room if it wasn't for either one or both of
those.
But the fact is, there is the deduction of college tuition
that hasn't really gone up. It is 4,000. It expires in 2005 for
tax deductions. The Hope Credit, which was originally for
community colleges, is stuck at 1,500 with the average cost of
community colleges are around $2,000, and the 529--well,
community college is still on average around the country is
around $2,000, and the Hope Credit needs to go up. It is the
vehicle of keeping people involved in the changing economy and
giving them a ticket to upward mobility.
On the issue here, in the 529, and I obviously apologize
for having left and I had to go to another hearing. Some
members talked about bringing uniformity, conformity and
standardization to both the fee structures as well as the--some
of the plans, and I want to associate myself with those words
and those ideas because I think they are important to give
people. I mean, just as a parent, you know, whether you are
comparing mutual funds, health saving plans, insurance
policies, college savings plan for your kids. I mean, there
is--we all know this. There is X amount of hours in the day and
you can say whatever you want. And giving people choice, but
when you have all that choice, as we are now witnessing some of
our seniors, who have plenty of time to look at savings plans
on discount cards that, choice leads often to confusion, chaos
and it is manufactured. It is not intentional.
And I do agree that if those who wanted to, the States
wanted to bring that kind of access and conformity they would
have done it already. The market would have demanded it. And so
they need sometimes adult supervision to help bring that
process about. And let me ask you one thing. On the $4,000
tuition deduction for college, 3,000 this year, next year and
the next 2 years goes up to 4. According to a Harvard study,
only 4 percent, only a third of the folks who are eligible take
it. Two-thirds do not take the college tuition deduction. It is
right on the 1040 form. It is available. It is one line. And
that is about as accessible as it can be.
What is the eligibility universe for the 529 plans? And
what is the world, and the percentage that take it? So what is
use versus eligibility on 529s? Anybody can take a shot.
Mr. Lackritz. At least the numbers that I was given
indicate that first of all, anybody can invest in these things.
I think the good news about the 529 plans is there are no
income restrictions. There are no limitations. And as a result,
they are universal--it is about the closest thing to a
universal program I think that there is. And the numbers I was
given indicate that about 8 percent of families have taken
advantage of this.
So there are over 4 million accounts, 529 accounts so far.
But that is in literally the last 3 years, since the 2001 tax
legislation which I think clarified it considerably and created
the tax free withdrawal provision. So from the standpoint of
how quickly it has increased, it has increased dramatically in
only 3 years and on that growth rate it is going to continue to
increase substantially.
Mr. Olivas. That speaks to the numerator. The denominator
is that these are kids not yet in school. I mean, some of these
are 6 months old and we won't be able to know until 18 years.
And so the denominator is increasing exponentially as well. And
so speaking about the participation rates in the numerator is
only a very small part of this. 8 percent would astound me if
that were somehow close to the denominator. I think that you
have to understand that given all the grandparents out there
and so forth, to get your arms around the universe of potential
participants is simply impossible.
Mr. Emanuel. Of the 8 percent is that--was there a big
growth right after the 2001 Tax Code, and then it has tapered
off, or do you see another spike coming? And is there anything
more in the details of who is participating. Is it people with
much younger kids, people with kids in their teens as they
start to focus on this?
Ms. Cantor. The average age of a beneficiary in these plans
across the country is about 8 years old, if that gives you some
sense. Also attached to some of the testimony you will see
charts on the growth in these plans. One thing I also want to
clarify that one of the other panelists said is that for the
most part, prepaid tuition plans were the only plans that were
around 10, 12 years ago. Savings plans did not really exist and
start to come into creation until the beginning of the year
2000.
So if you really look at you know the ability of an
industry to take hold of itself and to manage the growth that
it is experiencing these are still relatively brand new plans.
The savings plans have not been around for 10 years. And I
would say that the States are doing a fantastic job of
overseeing their plans and making sure that we move forward.
Mr. Olivas. These are plans that the State shut down as
soon as it got too expensive to maintain them. That is not a
record to emulate in the savings side.
Mr. Emanuel. Did you want to add----
Mr. Bullard. I agree with Professor Olivas. I mean, if the
States want to stand on their record of performance, then that
is the best argument for why we need SEC regulation.
Mr. Emanuel. I have no further questions Mr. Chairman.
Chairman Baker. Thank you Mr. Emanuel. I want to express my
appreciation to each of you. As you can tell, members had to
come and go, but there is significant and considerable interest
in this matter and I suspect as the plans grow in size,
congressional interest will only go in one direction. To that
end, I am very optimistic and appreciative for the work done by
the network and hope that leads us to some consensus set of
standards that perhaps by early next year the committee can
return to this subject and evaluate the progress made.
I would also say to our scholastic academic studious
analysts from the right, represented in various fine book
stores, that if there is a way to assemble data from 2001,
2002, 2003, years closed from a handful of States, with a
$10,000 typical or let's go $2,000 a year for each of 3 years,
make your point.
As to the lack of equality in fees, whatever concerns that
you elicited this morning in your testimony to the committee,
give us more substance as to past performance. Now, this is not
an indication, as I realize past performance is not an
indication of future earnings. But it will give us--I probably
have some of those pieces of mail in my box waiting on me. But
the point is, is it gives us a snapshot of where the problems
may really be and that would help the committee in its
evaluation of the model reforms which the network now has under
consideration, and perhaps over a continued discourse in this
matter we can come to some conclusion that is in everyone's
best interest.
Clearly facilitating opportunity for educational college is
something every American should support, and I believe they do.
But making sure the system is working in a fair manner and that
individual average investors are understanding what their rates
of return are is something that is very, very important if that
program is to maintain long term viability.
So I appreciate all of your various perspectives. We look
forward to working with you in the future. Our meeting stands
adjourned.
[Whereupon, at 12:07 p.m., the subcommittee was adjourned.]
A P P E N D I X
June 2, 2004
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