Alaska College Savings Program - A jewel in the crown of the University of Alaska
The opinions expressed herein are those of the authors alone and not of the University of Alaska.
By James F. Lynch & Ashok K. Roy
“The mind that has conceived a plan of living
must never lose sight of the chaos against which that pattern was conceived.”
A $5 billion plus college savings program portfolio giving one of the best long-term performances in the nation resides in the University of Alaska (UA). What manner of program is this? How did it come about?
The story of the genesis and success of the college savings program at UA has an uncommon arc with bold intentions, happenstance, and social forces all playing a role in resolving how far we have come. It magnifies the range of good public policy possibility on display. The story is fascinating like dancing on thresholds moving to a realm of public good. The sweep, trajectory, and extraordinary reach of this transformational program make it a veritable jewel for UA. Here is a shower of rain where every drop has caught a gleam.
Education Trust of Alaska
Few people are aware that UA houses one of the largest college savings programs in the country, the Education Trust of Alaska. According to the Morningstar 2013 529 College Savings Plans Industry survey, at approximately $5 billion, it ranked eighth of forty-seven state college savings programs offered as of December 31, 2012, and houses what is generally recognized as one of the top college savings plans in the country. UA partnered with T. Rowe Price to develop a plan which is marketed nationally under the T. Rowe Price College Savings Plan name. This plan has gained national recognition as one of the best in the country based on a number of factors, including long-term performance, cost, customer service, and governance. The T. Rowe Price College Savings Plan has consistently been ranked by Morningstar as one of the top five plans in the country and was recently reported by Morningstar to be one of the top three plans based on risk adjusted returns. In 2012, it was one of only four college savings plans in the nation to receive Morningstar’s Gold rating.
A version of the T. Rowe Price plan is marketed in Alaska as The University of Alaska College Savings Plan. It offers the same investment options as the T. Rowe Price College Savings Plan plus a very low cost option that includes a Tuition-Value Guarantee: a guarantee that the earnings will keep pace with tuition inflation if used for tuition at UA. Effectively, a participant can purchase tuition credits at today’s prices and redeem those credits anytime in the future at the then current upper division tuition rate for tuition at any UA campus. If the earnings in the account have not kept pace with tuition inflation, the Trust will make up the difference by making a supplemental deposit to the participant’s account. If the funds in the account are used for any other purpose, the actual earnings of the portfolio will be available for whatever purpose the account owner chooses. In addition, the Education Trust of Alaska also houses the sixth largest advisor sold college savings plan, the John Hancock Freedom 529, which is a multi-managed plan consisting of funds managed by a number of top ranked managers and offers four investment strategies.
College Savings Plans History
State sponsored college savings programs came onto the scene in the mid- to late 1980s, when a few visionary state legislators recognized that, with the rapidly rising cost of education and the accelerating increase in the use of student loans to finance those costs, the middle class would get squeezed out of access to higher education. These legislators established prepaid tuition programs in their states. The state of Michigan led the way and several states followed soon after. In Alaska, former state senators Jay Kerttula and Tim Kelly were two of those visionary legislators who saw the student debt crisis coming. In 1990, under their leadership and with the concurrence of then Governor Hickel, Alaska became the sixth state to adopt such a program when the Legislature directed The University of Alaska Board of Regents to administer what was then Alaska’s Advance College Tuition (ACT) Plan. The Legislature also recognized that the Alaska Permanent Fund Dividend (PFD) was an ideal vehicle for residents to fund a child’s education and provided a PFD Check-Off allowing residents to direct half of their dividend to be deposited directly into the college savings program for the benefit of a named beneficiary. This year approximately thirteen thousand Alaskans are participating in the program through the PFD Check-Off.
As UA was launching its prepaid tuition program, the state of Michigan filed suit against the IRS because it denied Michigan’s request for an exemption and required it to pay federal income tax on the investment earning of the fund securing the prepaid tuition liability. The court struggle between Michigan and the IRS went on for five years and was eventually resolved in the state of Michigan’s favor, but the IRS did not acquiesce.
At the same time as Michigan filed suit, representatives from each of the state programs and several of the states that were planning on establishing prepaid tuition programs were forming a national organization, the College Savings Plan Network (CSPN) under the auspices of the National Association of State Treasurers. UA was one of the founding members. The purpose of the network was to assist other states in initiating similar programs and help resolve the tax issues raised by the IRS.
Section 529 Passes
By 1996 CSPN and the interested states had garnered enough influence in Congress to get Section 529 of the Internal Revenue Code passed into law, which effectively quieted the objections of the IRS and its argument that the programs were subject to federal income tax on investment income. In addition to authorizing exemption to prepaid tuition plans, which function like defined benefit plans, Section 529 also authorized exemption for savings programs, which function like defined contribution plans. Unlike prepaid tuition plans, savings plans do not carry the potential liability for paying out a defined benefit even if the planned investment income does not materialize.
After Section 529 passed, nearly every state in the union adopted a savings program. Current US Senator Lisa Murkowski and former state senator Tim Kelly led the effort to create the current savings program, and former Governor Tony Knowles signed the bill into law. Alaska and Pennsylvania chose a unique approach and converted their prepaid plans to savings plans. The ACT Portfolio, the savings program successor to the ACT Prepaid Tuition Plan, functions like a prepaid plan if used for tuition at UA and like a savings plan if used for anything else. The participant can determine which best fits his or her needs at the time the beneficiary attends college or a qualified trade or technical school. This duality of the ACT Portfolio makes it an attractive option that is not offered in any other state plan.
Making Higher Education More Accessible
Recognizing that Alaska’s small population, with only 88,000 households with children under eighteen years old, could not support a cost-effective savings program or even attract a responsible investment firm to promote such a program, the university set out to create a high quality, self-supporting, national program that could be brought directly to Alaskans and also foster the national goal of making higher education more accessible all across the country. At that time, there were only a handful of individuals that had expertise in the college savings arena. UA was fortunate enough to have had that expertise on staff, and proceeded to locate a partner that had the resources and ability to put together such a program. UA chose T. Rowe Price as that partner. In fact, it was a mutual selection process. T. Rowe Price was looking for a state partner that shared the company’s values and would work as a partner to develop a quality program rather than dictating every decision. Although it was obvious that T. Rowe Price was a good investment manager with a long track record, good investment performance, and an outstanding reputation for quality, it was selected primarily due to emphasis put on customer service and the value placed on customers.
Even before the T. Rowe Price and UA plans were launched, it was clear that advisor-sold plans were growing at a much faster pace than direct sold plans like the T. Rowe Price College Savings Plan. The decision-making process for participants that self-manage their investments is quite slow relative to those who use an investment advisor. When an investment advisor makes a recommendation and assists the client tocomplete the paperwork, the participant has minimal apprehension about deciding if it is a good idea or if it’s the right plan. Based on the relationship UA had developed with T. Rowe Price on the direct-sold plans, T. Rowe Price introduced UA representatives to Manulife Financial (now known as John Hancock in the United States), which was interested in developing and distributing an advisor sold college savings plan. Manulife’s forte was in selecting outstanding managers and constructing high quality multi-managed portfolios. The three partners then worked together to develop and implement what is now the John Hancock Freedom 529. The underlying investments for the John Hancock Freedom 529 are managed by a host of world class managers, such as American Funds, Robeco, PIMCO, Franklin Templeton, Jennison, Oppenheimer, Dimensional, and T. Rowe Price.
Performance and Rankings
Investment performance was considered in the Morningstar rankings; however, performance was not the primary component. The Morningstar ratings also consider plan features, customer service, portfolio construction, management’s experience and stability, and oversight by the state. Although performance ranking can vary dramatically from period to period, in general, the Alaska plans’ performance rankings have been quite good. For the T. Rowe Price and UA plans, eleven of the twelve Morningstar rated portfolios in the plan are rated at four stars and the twelfth is rated at three stars. For the John Hancock Plan, fourteen of the twenty Morningstar rated portfolios are rated three stars or better.
The College Savings Plans Performance Rankings table shows the latest performance rankings by Savingforcollege.com, as of December 31, 2012 (rankings are reported as rank of the number of plans included in the analysis for the period).
In summary, UA has built a self-supporting college savings program that can serve Alaska’s residents as well as any in the country. The program to date has been a success in that it has helped thousands of Alaskans minimize their student debt burden and hopefully become productive members of our communities. However, a major component of the program’s value has yet to be realized: the ability to recruit potential students not just from Alaska, but from all across the country who have a high probability of being successful. This process will promote the development of a better diversified pool of students and a cadre of workers educated in Alaska and capable of filling positions in undersubscribed employment areas. When this occurs, the college savings program at UA will come full circle.
James F. Lynch currently serves as Associate Vice President for Finance & Chief Treasury Officer for the University System of Alaska and as Treasurer for UA Foundation. He was the principal architect of Alaska’s Section 529 College Savings Program and one of the founding board members of the College Savings Plan Network. He earned a BA from Northern Illinois University and certifications as a Certified Public Accountant and a Certified Government Financial Manager.
Dr. Ashok K. Roy is the Vice President for Finance & Administration/Chief Financial Officer for the University System of Alaska and Associate Professor of Business Administration at UAF. Dr. Roy has significant experience, at senior management levels, at three other large universities, local government, and in the private sector. Dr. Roy holds six university degrees and five professional certifications and has authored seventy-one publications in academic and trade journals.
Copyright © 2013 Alaska Business Monthly. All rights reserved.
Posted: August 1, 2013