(Opinion) Connecticut just changed who manages its college savings program. Here’s how to make that poorly executed change work for you.
On Feb. 5, Connecticut transferred management of its Connecticut Higher Education Trust 529 College Savings Program (“CHET”) from TIAA to Fidelity. The move was poorly publicized and executed, with little relevant information available online.
Despite this rollout, Connecticut residents able to save for college and set aside a few extra minutes of time can still secure high-quality, low-cost investments for their children’s future.
From Not-For-Profit Reliability To Fidelity
CHET offers tax-advantaged investing to Connecticut citizens wanting to save for the future educational expenses of their family members. From 1997 until this February, the not-for-profit company TIAA managed the 529 plan. A low-cost provider of investment options, TIAA has been hailed for its responsible behavior toward personal investors.
Among TIAA’s notable fans is David Swensen, perhaps Connecticut’s most famous investor, who has served for decades as the chief investment officer of Yale’s historically successful endowment. He explained his reasoning in his book for personal investors, Unconventional Success: a Fundamental Approach to Personal Investment.
“Investors fare best with funds managed by non-for-profit organizations [such as Vanguard and TIAA], because the management firm focuses exclusively on serving investor interests. No profit motive conflicts with the manager’s fiduciary responsibility. No profit margin interferes with the investor returns. No outside corporate interest clashes with portfolio management choices. Not-for-profit firms place investor interests front and center,” Swensen wrote.
In late 2019, for reasons that I have yet to understand, Connecticut sought bids for a new CHET management team. TIAA had served Connecticut well and continues to manage several statewide programs, including the behemoth 529 plan of California. Nevertheless, Fidelity was chosen as the new game in town.
Little Information, Easily Misunderstood
So how did the rollout go?
Well, for starters, the first notification I received from Fidelity about the transition was their letter to me that my funds had already been transferred. I would have liked more of a heads up, including an inquiry about where they should put my money.
Second, when I went online to see what the investment line-up was after the fact, I was disappointed to find that even though funds were transferred the first week of February, the fund line-up would only be available beginning April 15. (See the screenshot above, taken on Feb. 13.)
With a couple of emails and a phone call, I was finally able to get the information I wanted, but the whole experience left me feeling like I was dealing with some day-trading uncle rather than one of the largest investment firms in the world. Notably, I am pleased to report that when I recently rechecked the website after my call, they have now added a link to plan details.
When Fidelity gave me the information I was looking for, I found a mixed bag.
Fidelity’s Connecticut age-based index fund options look largely equivalent to what TIAA offers in California. Fidelity does indeed offer competitive expense ratios of 0.14 percent in these funds, giving investors the opportunity to take advantage of market-based returns at very low costs.
On the other side of the coin, Fidelity’s active management funds come in at approximately twice the price of the equivalent TIAA California option – ranging from 0.63 percent to 0.97 percent expense ratios. This means that Fidelity’s actively managed age-based options cost four to seven times the price of their age-based index fund options.
Given the starkly different prices of the funds, a quick look at the new CHET website gives me pause. The design and ordering of the options, along with the wordy descriptions of the active-management options, may serve to make Fidelity’s expensive age-based funds seem more attractive to inexperienced investors.
To see what I mean, take a look at the layout of the CHET age-based investment options below.
What would happen if they tried this instead?
My guess is that the interests of Connecticut — if not those of Fidelity — would be better served with the slight tweak I offer above.
In my own case, with a quick call to Fidelity, I was able to change my children’s savings from the middle option above — where they had been automatically transferred — to the much more cost-effective choice above at right.
Contributed Photos
Robert Schonberger, pictured, lives in Westville.
What are the lessons we might learn from the mixed rollout of Connecticut’s CHET conversion?
First, I believe that Connecticut residents should rightly expect better and more transparent communication from the Office of the Treasurer in the future. I shouldn’t have to wait until Fidelity already has my money before I hear from them.
Second, now that the CHET transition has occurred, Connecticut residents who are blessed to save for college should take a moment to review their options and then give Fidelity a call to make sure their investments are allocated in a way that is consistent with their goals.
Finally, it is never too late for Treasurer Shawn T. Wooden and his staff to consider working with Fidelity to nudge investors toward — rather than away from — the least expensive alternatives consistent with sound investment principles. If done well, such efforts would allow Connecticut residents to keep more of our money working toward our educational savings goals.