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State treasurer defends college savings program

By M.J. Ellington · (334) 262-1104

MONTGOMERY — After three years at the bottom of the college savings plan rankings, Alabama is pulling the plug on investment programs that raters termed expensive and mediocre.

Earlier this year Morningstar Inc., a national investment rating company, ranked Alabama’s Higher Education 529 Fund college savings as one of the worst in the country for the third year in a row.

The raters criticized the plan for its high broker fees, particularly for out-of-state investors. Morningstar also called the state’s 529 Van Kampen Asset Management portfolio “lackluster” and “clunky.” And Morningstar warned that over the long term, higher fees could have a negative impact on the plan’s overall investment health.

Alabama Treasurer Kay Ivey said Morningstar’s ranking method does not consider the health of a plan’s financial assets that she terms “very attractive.”

But bad press is bad press. In recent stories about 529 plans in The Wall Street Journal, Morningstar’s best and worst college savings lists again ranked Alabama at the bottom.

Ivey said that after the latest Morningstar rankings, the state’s board that oversees the 529 savings plan in August directed Van Kampen to drop some of the plan’s lowest-performing investments.

“They have the power of the pen,” Ivey said. “How do you compete with that

  • A lot of people in Alabama read The Wall Street Journal.”

    New request in 2010

    In 2010, when the management contract with Van Kampen expires, the board will do a new request for proposals from interested asset management firms. Van Kampen began managing the savings plan assets in 2000.

    States throughout the country offer college savings plans as a lower-cost way for families to pay for their children’s college education.

    Ivey said there is no question that providing a way for children to go to college is a sound investment. People with a college degree earn an average of $19,000 more per year than those with a high school diploma, she said.

    At the end of June, Alabama’s 529 plan, sold nationwide, had assets of $659.7 million with 61,169 subscribers. Only 8,500 of the state’s 529 plan subscribers were Alabamians and only $70.1 million of the assets were from inside the state.

    Ivey said those facts help debunk Morningstar’s contention that the state’s program is a bad investment, even for investors from other states.

    Alabama also offers two other college investment plans.

    The Higher Education 529 Fund (direct sold) plan is for people who meet the plan’s Alabama residency requirements. Van Kampen manages the plan’s investments, but Alabama participants can avoid the broker fee that out-of-state residents pay.

    Alabama’s Prepaid Affordable College Tuition Program, which pays for tuition and most fees at state colleges and universities, had $781 million in assets. The state’s first college savings program, PACT is open to new enrollees only from Oct. 1 to Dec. 31 each year.

    Morningstar’s assessment also looked at trends among college savings plans in other states, including cuts in plan fees and increasing numbers of states offering tax breaks to encourage college savings.

    Tax deductions

    The assessment noted that Alabama passed legislation in 2006 that makes withdrawals from the savings plans tax exempt for “legitimate educational purposes.” It rated the state negatively, however, because there is no state income tax deduction for contributions to the plan.

    State Deputy Treasurer Anthony Leigh said Rep. Richard Lindsey, D-Centre, introduced legislation in 2007 to allow a deduction for the first $5,000 in college plan contributions on state tax returns.

    After negotiations with teacher lobbyist Paul Hubbert, supporters were able to get the bill out of committee, but it died without passing the House or the Senate, Leigh said.

    Ivey said the bill will come up again in the next session.

    Alabama 529 Board

    The Alabama 529 Board has oversight over the state’s college savings programs. Members meet quarterly, with the next meeting scheduled for Nov. 28.

    Ex-officio members:

  • Alabama Lt. Gov. Jim Folsom

  • Two-year college Chancellor Bradley Byrne

  • Alabama Commission on Higher Education Executive Director Gregory Fitch


  • Kay Ivey, Alabama treasurer, chairwoman

  • Tom Broughton, Service First Bank, Birmingham, lieutenant governor’s appointee

  • Russell Buffkin, attorney, Mobile, governor’s appointee

  • Willie Huff, financier, Birmingham, treasurer’s appointee

  • Ricky Jones, Andalusia distributing vice president, Andalusia, speaker of the House appointee

  • Ed Lewis, businessman, Auburn, governor’s appointee

  • Harold McGee, president, Jacksonville State University, Council of Presidents appointee

    M.J. Ellington

    About Alabama’s college savings plans

    The state of Alabama offers three plans to save for college education:

    Higher Education 529 Fund

    (Direct-sold, in-state only)

    Summary: Save for undergraduate or graduate college education. Deductions from plan for legitimate education expenses not taxed. Open only to people who are Alabama residents at enrollment.

    Who is eligible: U.S. citizens and resident aliens 19 or older.

    How to enroll: Through state treasurer’s office.

    Initial contribution: $250 minimum.

    Other contributions: $25 and up, depending on investment choices.

    Enrollment fee: None.

    Account maintenance fee: None.

    Program management fees: None.

    Other: There may be additional expenses connected with investing.

    Higher Education 529 Fund


    Summary: Enables participants to save for undergraduate or graduate college education. Deductions from plan for legitimate education expenses are taxed for out-of-state participants. Open to non-Alabama residents.

    Who is eligible: U.S. citizens and resident aliens 19 or older.

    Eligible uses: Undergraduate, graduate, law school, other education.

    How to enroll: Must use an investment broker.

    Initial contribution: $1,000 minimum.

    Maximum contribution: $300,000.

    Other contributions: $25 and up.

    Enrollment fee: None, but possible sales tax charges.

    Account maintenance fee: $25 per year on accounts of $25,000 or less.

    Program management fees: Vary.

    Other: Out-of-state investors pay higher fees.

    Tax exemption: No exemption on education withdrawals for out-of-state investors.

    Prepaid Affordable College Tuition Program

    Summary: Four-year and one-year packages covering education at an Alabama public college or university. Conversion to private or non-Alabama institutions possible.

    Who is eligible: Do not have to be Alabama resident. U.S. citizens or resident aliens, 19 or older

    Enrollment: Only open Oct. 1 through Dec. 31 each year.

    Enrollment fee: $100.

    Where to enroll: Alabama treasurer’s office.

    Costs: Pay in advance or in installments. Four-year contract range of $21,830 for newborn to $23,388 for ninth-grader. One-year contract range of $5,767 for newborn, $6,167 for ninth-grader.

    Tax exemption: Deductions from the plan for legitimate education expenses not taxed.

    More Information: Call Alabama state treasurer’s office at (800) 252-7228 or visit treasurer’s Web site at

    M.J. Ellington

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