Review of the Overhauled D.C. College Savings Plan

Finally, a Much-Needed Overhaul of D.C.'s College Savings Plan

Last month, I rejoiced after receiving a brochure in the mail touting "new enhancements" to the D.C. College Savings Plan (529 Plan). My wife seemed to think I was the only resident of D.C. excited by this news. Who wouldn't be excited??

Some background: For the last couple years, I've been on a mission to get a new program manager for the D.C. 529 Plan. The old program manager, Calvert Investments, provided expensive and mediocre investment options, which made D.C.'s offering difficult to recommend over superior plans from other states.

During my quest to change the plan's program manager, I exchanged several emails with Jeffrey Barnette, the D.C. Treasurer and Deputy CFO, and John Henry, D.C. Associate Treasurer. They told me:

  1. Due to the small population of D.C., Calvert Investments was the only company interested in managing D.C.'s plan.
  2. Because Calvert was managing the plan, D.C. residents would have access to socially responsible actively managed mutual funds "which naturally come with higher expense ratios than funds that are not actively managed, such as passively managed index funds".
  3. Due to demand from participants, D.C. added a passively managed fund, the State Street Equity 500 Index fund. Oh, and by the way, it just happens to have an expense ratio of 0.50%. Not good. For comparison purposes, the Vanguard 500 Index has an expense ratio of 0.04%. That's a difference of 0.46%! While expenses aren't the only factor to consider when choosing an investment, they are extremely important. Here's what you need to remember: High expenses bad, low expenses good.
  4. D.C. recently issued a Request for Proposal (RFP) for a new service provider. Naturally, this news made me happy.

Even NBC's News 4 I-Team, which surprisingly is not at all like The A-Team, ran a story questioning the costs associated with the Calvert-managed D.C. plan.

I was able to get a copy of the RFP and review it for myself. After that, I heard nothing from D.C. until I received the brochure in the mail. And the news was good: Calvert would be replaced by Ascensus as the program manager and, more importantly, participants would have access to investments from Vanguard, Dimensional Fund Advisors, and iShares.

Here's a breakdown of The Good and The Bad of the new plan.

The Good

  1. Easier online enrollment: The process of opening an account online has been streamlined and should take just a few minutes.
  2. A lower initial contribution: Under the old plan, the minimum initial contribution was $100. The new minimum is $25.
  3. Better investment options: Like the old plan, the new plan offers both individual investments and age-based portfolios (now called Year of College Enrollment Portfolios). The big difference between the plans is the investment options. Participants now have access to low-cost mutual funds and Exchange Traded Funds (ETFs) from Vanguard, Dimensional Fund Advisors, iShares, Schwab, and JP Morgan.
  4. Less expensive investments: Under the old plan managed by Calvert, investment expenses were as high as 1.66%. There's no excuse for that. Under the new plan, investment expenses are far more reasonable, ranging from 0.15% to 0.80%.

The Bad

  1. Actual investment options are difficult to find: As a financial nerd, I want to know what exactly I'm investing my hard-earned money in. The problem is that I really had to dig into the site to find out what the underlying investments were. For example, the U.S. Total Stock Market Index Portfolio is actually the iShares Core S&P Total U.S. Stock Market ETF (ticker symbol ITOT).
  2. Individual investments feature inflated expenses: I looked at each of the individual investments and found they were inflated by 0.30% - to 0.44%. For example, the U.S. Total Stock Market Index Portfolio, which is actually the iShares Core S&P Total U.S. Stock Market ETF (ticker ITOT), currently has expenses of 0.03%. However, the D.C. plan charges 0.33%. Why the difference? I don't know, but I'm going to find out.

The Verdict

The D.C. College Savings Plan, now managed by Ascensus, is a huge improvement over the plan as managed by Calvert Investments. I feel much better about recommending the D.C. plan to clients and friends.

Maybe now I can get Morningstar to include the D.C. plan in their annual rankings of best (and worst) 529 plans. For the past four years, I've asked Morningstar to include the plan and every year the answer is the same: "the D.C. plan is too small to include in our rankings". 

Listening / Reading / Watching

Here's what has my attention right now:

  • The backlog of Wired magazine issues sitting on my nightstand: It's time I read through these so I can make room for more books and periodicals.
  • I need some recommendations for TV: Now that Legion and The Walking Dead have wrapped up their seasons, I'm searching for new sources of entertainment.