[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
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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

                              ----------                              
                                                                   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


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                     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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