The rating for Arkansas’s iShares 529 savings plan dropped recently from bronze to neutral, according to an October report from MorningStar.
MorningStar is an investment research and investment management firm headquartered in Chicago, according to its website.
Arkansas’s iShares 529 savings plan is an advisor-sold plan that allows parents and grandparents to save for their children’s or grandchildren’s post-secondary education while receiving tax benefits.
According to MorningStar, a neutral rating is given to a plan that “isn’t likely to deliver standout returns but also isn’t likely to significantly underperform.” The only rating lower than neutral is negative, according to MorningStar.
MorningStar explained in late October what causes them to downgrade certain plans:
So, what spurs a downgrade? Oftentimes it is a result of plans not keeping pace with the increasingly competitive landscape. In general, the industry continues to move toward best practices via fee cuts, beefed up asset-allocation resources and processes, and improved investment lineups. Plans that sit still can fall behind in this rapidly evolving setting.
Lee Acheson, a CFA with MorningStar, explained in the report that the downgrade of the Arkansas iShares plan was the result of “subpar oversight” and “hefty” costs of the plan:
Arkansas’ advisor-sold iShares 529 plan’s rating fell to Neutral from Bronze because of subpar oversight. This plan’s stand-alone options and age-based portfolios invest in iShares exchange-traded funds exclusively, but iShares Core offerings are notably absent from the mix. The iShares Core offerings are much cheaper than the plan’s current options. For example, the plan includes iShares Russell 1000 and iShares Emerging Markets with expense ratio of 0.15% and 0.67%, respectively. However, iShares Core S&P 500, which costs 0.04%, and iShares Core Emerging Markets, which costs 0.14%, provide similar exposure for much lower fees.
On the surface, the existing options may not seem too expensive, but the plan’s 0.35% program-management fee more than doubles the cost of many of the existing options. The inclusion of iShares Core options would help rein in the plan’s already hefty costs and indicate that those in charge have college-savers’ best interests in mind.
To put it another way, the plan’s investment manager is offering shares that are almost triple the cost of other investment shares that the manager could offer instead. These plan expenses are quite high, given the fact that the plan is utilizing passive, index-like funds.
Grant Wallace, a spokesman for the Arkansas Treasurer’s Office, said that the office wouldn’t be making “knee-jerk reactions” resulting from the downgrade, but he added that some of MorningStar’s suggested changes were “something that’s on the agenda.”
Wallace told The Arkansas Project in a phone interview last week:
Nothing really dramatically changed during the time period they were reviewing, so it’s kind of hard to get where they’re going when they say “downgrade,” when no significant changes of how the program was being administered from the previous time period to the time period they were reviewing.
A couple of the issues they did bring forth as far as the pricing…the plan is one of the top five cheapest plans in the country. We are consistently reviewing all of the options available. The core option that was referred to in the review was really rolled out by Black Rock’s (the ishare administrator) core option about six weeks prior to when this review actually went out. It hadn’t been out long enough yet to see what it was all about, and it really hadn’t been traded enough to incorporate in the plan at this point. It is something that’s on the agenda. It was brought up at our last meeting as something to look at in the future. It just needed a little more time to see how the market was going to react to it, and to see how it was going to work, and how we could incorporate in the ishares plan.
Wallace said Dennis Milligan, Arkansas State Treasurer, had put “a real focus on promoting and enhancing the 529 program” since taking office in 2014.
With all due respect, I don’t think Treasurer Shoffner did a lot with the 529 program and a lot of it was just passed on to pass on. Since taking office, Treasurer Milligan has put a real focus on promoting and enhancing the programs, and we have reviewed and are constantly reviewing plans to make sure that we are getting the best available product to future beneficiaries and program participants right now.
The real, tremendous thing we’ve been able to accomplish this year is we cut the administrative fees for the program 24 percent. That means more money is going into the accounts of the participants, and it means more opportunities for higher education at the end of the day.
According to the State Treasurer’s Office, the state is spending $164,000 promoting the program this fiscal year.
Wallace said the State Treasurer’s Office had produced a broad array of earned media, paid media, different statewide contests, and partnerships with the Travelers and Arkansas State University sports program to promote the program.
We’ve done things all across-the-board to really enhance and get the word out about this 529 plan.
When I asked Wallace about whether the Treasurer’s Office had done research regarding the performance of the in in-state 529 plan versus an out-of-state plan, he said they had done research and he’d forward along research from the program manager later.
We’ll have a follow-up story describing this research at a later date.
Wallace said that main benefit is the tax deductions associated with the plans.
The gift plan and the ishares plan both for Arkansas residents get a tax deduction — for a couple, it’s up to $10,000; for an individual, it’s $5,000. That’s the number one benefit. The second benefit is it’s right here in your home state. We are right down the street. If there’s an issue you can pick up the phone and call us and we’re right here to work with you. You don’t have to call another state or somewhere else. You can really get that hands-on assistance right here in the home town. The top main focus is you get the tax deduction for using these plans. At the end of the day, it’s all about the dollars. What makes this more attractive than going elsewhere, it’s the reality of you get the tax deduction. It’s that you can give the gift of higher education to your child and grandchild, but you also get the tax deduction benefit from doing it.
Wallace also said there wasn’t any monetary benefit to the state for investors purchasing a 529 plan. However, he said there was a benefit to the state in allowing Arkansans to save for post-secondary education.
No (monetary) benefit to the state. The benefit is you have more people going on to a post high school education. That benefits the state of Arkansas when we have a higher educated workforce. That brings more jobs to the state. That increases our ability to go out there and be competitive not only across the county but across the world. That is the direct benefit that the state gets. Is there a monetary benefit to (the state)? No.