Opinion: Clarion Call

Call. 60: Buyer Beware: Some State College Saving Plans Don’t Add Up

Are tax-sheltered state college saving programs, such as North Carolina’s College Vision Fund, a good buy or a big scandal? According to a recent article by Forbes magazine reporters Thomas Easton and Michael Maiello, many of the funds suffer from inflated fees, limited disclosure and corruption. “Be sure you’re an educated investor,” warn Easton and Maiello.

In their report, Easton and Maiello grade state-run college savings plans “on a curve,” based on the management fees charged to the state by investment companies that manage the programs and the additional fees charged to investors.

“Consider Colorado and West Virginia, two state whose college savings plans are run by Citigroup’s Salomon Smith Barney unit,” write Easton and Maiello. “Colorado’s plan is being marketed nationally. But the West Virginia plan – to be launched in April – will be the better investment. In each case, Salomon receives a management fee of one percent. In Colorado, the state levies as much as a 0.3% fee on top. West Virginia takes nothing. On a $100,000 account, the Colorado surcharge costs you $300 a year – compounded. If your youngster is in diapers now, Colorado could make you $10,000 poorer at cash-out time.”

So how does North Carolina stack up? “Our report did not examine North Carolina,” Maiello told Clarion Call. “But the most important thing in assessing a fund is finding out what type of fund it is.” “Different funds trade at different frequencies. An index fund, for example, should be cheap because it merely parrots an existing model. It is a collection of stocks which rarely changes. The S&P 500 is a good example. The 500 companies in its roster don’t change much. So if you invest in an index fund based on the S&P 500, you shouldn’t have to pay much into trading fees and you shouldn’t have to pay a manager.”

According to Tracy Ireland, Media Director of the College Foundation, Inc., which manages the College Vision Fund, North Carolina’s state saving program is a different animal. “The College Vision Fund is run by the State Treasurer’s office, so money is invested in the Treasurer’s short term investment accounts primarily in U.S. Treasury instruments.” The College Foundation receives no account set up fees and maintenance fees. “We are one of the lowest fee state tuition plans in the country. From the amount that the state treasurer’s office pays participants, we deduct .5 percent.”

So, in comparing North Carolina to Iowa, Utah and New York, those states assessed by Easton and Maiello as having among the lowest fees, North Carolina ranks well. Iowa charges .3 percent, Utah charges .35 percent, and New York charges .65 percent. The .5 percent that the College Foundation charges to investors pays for operating cost of the program, maintenance of account and operating expenses to maintain the College Vision Fund. “Fees can be changed from year to year depending on economic conditions,” said Ireland, “But North Carolina is recognized as one of the best fiscally managed states in the country, so we do not anticipate the fees rising.”

Pope’s Faculty Salary Study Makes Waves

The Pope Center’s annual faculty salary study is making headlines and fueling debate among legislators and educators in Tennessee. Tennessee Sen. Marsha Blackburn, R-Brentwood, said the study appears to undercut arguments that professors are leaving the state for higher pay elsewhere, which is one of the main arguments made by Tennessee Gov. Don Sundquist in pushing for a state income tax. “Seeing the study caused me to question why they are leaving,” Blackburn told the Tennessean. “We get a lot of conflicting information, and I’m trying to make sense of it,” said Sen. Jeff Miller, R-Brentwood. The Locke study has been widely circulated in the Tennessee legislature. The Tennessee Family Institute, an active opponent of the state income tax, has distributed the study as well. For more on the controversy, see www.carolinajournal.com.