Sunday, January 10, 2016

Chuck Donalies: DC College Savings Plan (529 Plan)

From: Charles Donalies []
Sent: Sunday, January 10, 2016 9:45 AM
Subject: DC College Savings Plan (529 Plan)


This might be of interest to Bloomingdale parents considering an investment in the DC 529 plan:

I've fielded many questions about the DC College Savings Plan (529 Plan) since launching my firm. One of my primary concerns about the DC Plan is the cost of the investment options provided by Calvert Investments. I recently sent an email to the Office of the Chief Financial Officer (OCFO) regarding the current plan's high fees and a request to change the plan manager. I've pasted my letter below as well as the response I received this afternoon.

Here's the short version in case you don't want to read everything:

DC is aware of the high fees in the plan, but they had limited interest from investment companies when starting the plan. They attribute the high fees to Calvert's use of actively managed, socially responsible mutual funds, rather than low-cost index funds. DC has issued a request for proposal for a new plan manager and hopes to receive responses soon.

I'll check in with the DC OCFO again in a few months and let you know what I learn, if anything. DC residents deserve a better college savings plan!

Chuck Donalies, CFP®

My Letter:

To John Henry, Ruth Werner, and Jeff Barnette:

I’m a Certified Financial Planner, Registered Investment Advisor, and 12-year resident of DC. I decided to contact you because I’m frustrated by the management of the DC College Savings Plan. Specifically, I’m frustrated by the manager, investment options, and expenses.

Here are two examples:

1.     Nevada’s 529 Plan is managed by Vanguard. Vanguard’s 500 Index Portfolio has an expense ratio of 0.21%. For comparison purposes, the DC Plan offers the State Street Equity Index 500 with an expense ratio of 0.46%. That’s more than twice the expenses in the Nevada Plan!

2.     Again, let’s look at Nevada’s Plan. Vanguard’s 0-5 Age-Based Portfolio has an expense ratio of 0.19%. DC’s 0-5 Age-Based Portfolio has an expense ratio of 1.16%. DC residents are paying nearly 1% more for the DC age-based fund. Outrageous!

The plan is currently managed by Calvert Investments, which offers poor-to-mediocre investment options with extremely high fees. As a financial advisor and father of two little girls I find it difficult to recommend and use the DC plan because of the lousy funds and high expenses. The tax benefits are nice, but the negatives far outweigh the positives.

I’d like to discuss the possibility of replacing Calvert with another company. Thank you in advance for your consideration in this matter.

All the best,

Chuck Donalies, CFP®

And DC's Response:

Dear Mr. Donalies: 
Thank you for your email letter to John Henry, OCFO, and Ruth Werner, D.C. Council, dated January 4, 2016, in reference to the management of the DC College Savings Plan.

Regarding the expense ratios for the DC College Savings Plan (529 Plan), we would agree that the plan has some funds with a higher than average expense ratio when compared to other state’s 529 plans. Due to the initial size of the DC College Savings Plan we tried to design a program that would be successful in a jurisdiction with a small population and an initial small plan asset base. This led to a limited number of program managers who were interested in managing the DC 529 Plan. Therefore, we selected the best manager that could manage and market the program as well as grow the asset base, which was Calvert Investments (Calvert).
Calvert is a strong believer in actively managed funds and specifically socially responsible managed funds, which naturally come with higher expense ratios than funds that are not actively managed, such as passively managed index funds. Calvert believes that active management adds value and will yield a higher risk-adjusted return over the long term. We realize that many participants would prefer a passively managed option so we added the State Street Equity 500 Index fund that cost 50 basis points to the current investment line-up. 
We have issued a request for proposal (RFP) for a new service provider for the DC College Savings Plan and we expect to receive responses shortly. We have requested in the RFP that the provider offer a broader line-up of investment options to include a wider array of passively managed index funds, which have a lower cost.
We continue to review our College Savings plan with respect to the fees, performance, and administration and we strive to provide a program that is comparable to other College Savings plans. The Office of Finance and Treasury with the assistance of our consultant provides oversight of the plan and will continue to work with the program administrator to ensure that District residents have an attractive tax-advantaged program for college savings. Please do not hesitate to email or call if we can be of further assistance. We look forward to you investing in the DC College Savings Plan.
Jeffrey Barnette
D.C. Treasurer and Deputy CFO
Chuck Donalies, CFP®
Donalies Financial Planning, LLC

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