An investment research firm has downgraded Maine’s 529 higher education investment fund, though state officials say the move means little.
Morningstar Inc. on Thursday released its annual report on the nation’s college savings plans. Maine’s $5.3 billion NextGen plan, which is run by Merrill Lynch, had been rated at “above average.” Morningstar downgraded it by two notches to “below average.” It was the biggest downgrade the firm made among the states.
“The downgrade means nothing, practically,” said Beth Bordowitz, CEO of the Finance Authority of Maine, which administers the NextGen plan. “Morningstar is a for-profit organization. They undertake this review, and frankly, it varies every year. We certainly don’t take much stock in what they say.”
Maine Treasurer Bruce Poliquin, who’s on the FAME board, agreed.
“It’s not very clear what they use to make their ratings, but it’s not like a bond rating where it’s a reflection of the health of a state government, for example,” said Poliquin.
According to a Reuters story, the downgrade was because of how Merrill Lynch investment advisers sold the NextGen plan to investors and the fees associated with the Maine plan.
At least one of the reasons for the downgrade seems to reflect problems with the plan that were resolved a few years ago.
Reuters reported that the Financial Industry Regulatory Authority in January fined Merrill Lynch $500,000 for not having proper procedures in place to ensure its advisers told potential investors about state-related tax credits they could get from investing in their own state’s 529 plans. So, Reuters reported, investors who were sold the NextGen plan could have missed out on tax benefits.
There are about 220,000 NextGen accounts nationwide, with roughly 14,000 in Maine.
Matthew Card, a spokesman for Bank of America-owned Merrill Lynch, said Friday that the company has “reminded our employees that selection of college savings plans includes consideration of state tax advantages as one factor in the investment decision.”
“In addition, we took steps several years ago to ensure employees document that this factor was discussed with clients,” Card said.
Asked if this report might cause some potential savers to avoid the NextGen program, Bordowitz said, “I would certainly hope not. Nothing has changed last year to this year.”
Morningstar reported the average fees for investment program accounts were 1.47 percent. It listed the NextGen program at 1.53 percent. But both Bordowitz and Card said the 1.53 percent is an average of a range of plans offered under NextGen, some with much lower fees, some with higher.
“NextGen is one of few multi-manager college savings plans that offers clients a wide range of investment choices. The fees associated with this wide range of investment options vary, with some options having higher fees than others,” said Card.
A 529 account is sort of like a 401k but is aimed at saving for higher education. Funds can be put into a variety of investment accounts. Some accounts protect the principle — if you put in $500, you will be able to take out at least $500 for higher education. But the account won’t earn much, either.
Others are higher risk accounts, where the greater returns may be realized, but you also might lose money. One of the benefits of the 529 program is that any return realized is tax-free if it’s used for higher education.
Maine has incentives to encourage people to save money for higher education in the NextGen program, said Bordowitz.
One of the biggest incentives was launched several years ago by a private group in Maine, the Harold Alfond Foundation. The foundation launched a pilot program in 2008 that would put $500 into the NextGen account of babies born at one hospital in central Maine. In 2009, the Harold Alfond College Challenge program went statewide.
According to Greg Powell, chairman of the foundation’s board, more than 10,000 children now hold Harold Alfond College Challenge accounts.
Powell said Friday he wasn’t concerned with the Morningstar downgrade.
“I don’t see this rating downgrade having any bearing on the Harold Alfond College Challenge program,” he said. “We have a lot of confidence in the finance authority. We feel it does a very thorough job of monitoring the program.”