DFA, American Funds Win Slots in Nebraska 529 Plans

By Emile Hallez

April 21, 2016

Dimensional Fund Advisors and American Funds recently won distribution deals with Nebraska's $3.6 billion 529 college-savings programs.

One fund from each family will be added on April 29 to the programs' menus, becoming the first investment options within the program for each of those managers.

The Nebraska program manager, First National Bank of Omaha, this week announced that the state's investment council had approved the fund changes. Dimensional's World ex-US Government Fixed Income Fund will replace the SPDR Barclays International Treasury Bond ETF as an underlying investment option within the age-based portfolios in the state's three plans, the NEST Direct plan, NEST Advisor plan and TD Ameritrade plan. That change is meant to help reduce volatility, according to the bank and program manager.

The program has two and half dedicated wholesalers, who routinely ask advisors about investments they would like to see on the menu, says Deborah Goodkin, managing director of savings plans at First National Bank of Omaha.

"They come back with a variety of fund managers that [advisors] think are very important to them, and DFA was on the top of the list," Goodkin says.

Dimensional's funds have recently been added to several 529 plans, including those of Montana, Virginia and Missouri, says Paul Curley, director of college savings research at Strategic Insight.

Dimensional declined an interview request about its expansion in the 529 market, though the company said in a statement that it has been working with college-savings programs for more than a decade and now has funds within 15 such plans.

"Over this time, we've seen an increased interest in the way we implement our investment solutions from a number of different areas including the 529 market," the company states.

The Nebraska program is also adding the American Funds Income Fund of America as an individual investment option within the advisor-sold plan. Greater demand from advisors for an income fund, as well as recommendations to include investments from the Capital Group subsidiary, led to that fund's inclusion, Goodkin says.

"The advisors were talking a lot about an income fund — one that has both stocks and bonds," she says. "It was very important to them and certainly to RIAs."

The bank's contract as program manager is set to expire in December 2017. Implementing changes to reduce costs and volatility could help give the bank a strong argument in a bid for a renewal, Curley says.

"Making the change now is timely," he says.

As of the end of fourth quarter of 2015, the program's direct-sold plan had more than $1.7 billion in assets under administration, while the advisor-sold plan had $901 million, and the TD plan had $833 million, Curley says.

The program also made several other changes to the underlying investments of its age-based portfolios, including a swap of the Goldman Sachs Prime Obligations Money Market Fund for the Goldman Sachs Financial Square Government Money Market Fund, in response to money market reform taking effect later this year.

The program also will trade Vanguard's Inflation-Protected Securities Fund with the same company's Short-Term Inflation-Protected Index, in order to reduce duration, within the direct plan and TD Ameritrade plan, Goodkin says.

Within the advisor-sold plan, the program is swapping the Dreyfus Bond Market Index Basic Fund for the iShares Core US Aggregate ETF. The change is meant to reduce cost and improve performance. That plan will also replace American Century's Inflation-Adjusted Bond Fund with Vanguard's Short-Term Inflation-Protected ETF.

As a result of the fund changes, fees will decrease between 1 basis point and 4 bps for 75% of the portfolios within the direct plan. Within the advisor-sold plan, costs will drop between 1 bp and 6 bps for 85% of portfolios. Similarly, 85% of portfolios within the TD plan will save between 1 bp and 5 bps, according to the program manager.

The program is also adjusting the allocations within its age-based and static portfolios, including a gradual reduction in risk across its aggressive, growth, index and conservative portfolios. The program's more conservative portfolios also trimmed allocations to TIPs, among other changes.

"We've seen an increase in number of age-based categories, or buckets. And we've also seen a more gradual shift in allocation between one bucket to the next," Curley says. "The space in between [many of] the age brackets was too wide and too different."

Nebraska's program menus have between 18 and 20 investment options, including underlying investments in the age-based portfolios, which participants can select individually. Most of those investments are mutual funds, though the program also includes two collective investment trusts managed by State Street.

The majority of new contributions in the direct and advisor-sold plans go into the age-based portfolios, while most of the contributions within the TD Ameritrade plan go toward individual funds, Goodkin says.

First National Bank of Omaha became Nebraska's program manager in 2010, replacing Union Bank and Trust of Nebraska. During that time, the program's total assets have grown from $2.2 billion to about $3.55 billion, Goodkin says, adding that it has taken steps to reduce costs every year.

"We're in a really great position; we can choose to swap out funds or make changes without worrying about having to put our own family in," she says. "We're not beholden to our own funds."

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