Those fund firms hoping to turn 529 plans into a profitable product are on the receiving end of a wake up call placed by New York State.

New York State Comptroller Alan Hevesi said that the New York State Higher Education Services Corp. (HESC) selected a consortium of the Vanguard Group, Columbia Management Group and Upromise to take over the $1.8 billion New York College Savings Program in November.

The change was made after a five-year-old contract with TIAA-CREF expired on July 30. TIAA-CREF will continue to administer the plan through a transition period that is set to end on November 14. Although TIAA-CREF administers 13 states' 529 programs, the New York plan represented more than half of the assets it handles in this area. Under the terms of the expiring contract, TIAA-CREF will be able to manage existing assets in the plan for up to five years.

The HESC said that it and the office of the State Comptroller decided to award the mandate based on the cost to program participants as well as the quality of proposed administrative, marketing and investment management services.

Vanguard won the deal by offering to take over both asset management duties and administration of the plan for a reported 40 basis points. TIAA-CREF had bid 60 basis points for the business and declined an opportunity to match Vanguard's lower bid.

At those prices it is unlikely that most players in the 529 space would be able to turn an immediate profit. With some 300,000 accounts, including 98,000 added in 2002, the average balance for the plan is just $6,000 in round numbers. At 40 basis points, each account would generate only $24 in annual income for Vanguard. The request-for-proposal first sent to potential administrators called for New York to be paid about $3.7 million a year for administrative and marketing costs. That figure translates into $12.33 per account.

The State has not released the final terms of the contract and it is not known if the fees were changed from the initial RFP.

While Vanguard is expected to administer the updated plan and offer a direct-sold version of the product, Columbia Management will likely offer an advisor-sold plan to investors. TIAA-CREF's bid for the business did not include an advisor-sold option for the state to offer.  

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