January 15-16, 2004

 

ITEM 122-109-R0104                  Montana Family Education Savings Program; Changes in Investment Options

 

THAT:                                       The Board of Regents of Higher Education approves the following changes to the investment options offered under the Montana Family Education Savings Program:

(1)  Offer comparable individual mutual funds, called the Portfolio Optimization Funds, to replace the existing portfolio optimization models.  As part of this change, Pacific Life is also requesting approval of the addition of the PF Goldman Sachs Short Duration Bond Fund to the investment options available in the Program.  This new fund will be included in the asset allocation strategies of the new Portfolio Optimization Funds.

(2)  Automatically transfer the assets from all accounts that use the current portfolio optimization models to the comparable Portfolio Optimization Funds on January 30, 2004.

 

EXPLANATION:                        Background 

The Montana Family Education Savings Program (“MFESP”) was established pursuant to the “Family Education Savings Act,” Ch. 540, L. 1997 (the “Act”) and amended in 2001, Ch. 468, L. 2001.  The MFESP was designed to comply with section 529 of the Internal Revenue Code in order to offer participants favorable tax treatment.

 

The Act authorizes the Board of Regents of Higher Education (“BOR”) to implement the program and creates an Oversight Committee under the authority of the BOR to assist in the implementation and administration of the program.  In 1998, the BOR contracted with College Savings Bank (“CSB”) to serve as account depository and program manager of the Montana Family Education Savings Program.  As part of its role as manager, a CSB subsidiary, College Savings Trust, Helena, Montana, holds all accounts in trust for the benefit of the account owner and the state of Montana.

 

In January, 2002, the board authorized the expansion of investment choice in the program through the addition of 14 “best of class” mutual funds available through Pacific Funds along with five portfolio optimization models.  Pacific Life is replacing the 5 portfolio optimization models with 5 new funds, commonly called fund-of-funds.  Each new Portfolio Optimization Fund uses the same asset allocation strategy to determine how much to invest in the underlying funds in order to achieve its investment goal.  However, rather than being invested in each of the underlying funds, the account owner will be invested in a single mutual fund.  This will provide account owners with additional flexibility and ease when opening and maintaining their 529 plan accounts including:

1.       Simplified transaction confirmations and quarterly statements.

2.       Performance monitoring is simplified.

3.       Withdrawals are simplified.

4.       Annual model updates will still occur.

 

The transfer from the portfolio optimization models to the comparable Portfolio Optimization Funds is recommended to be automatic so that account owners will not lose their one allowable investment change per year.  If it were not automatic, the decision to discontinue use of the portfolio optimization service and exchange into the comparable Portfolio Optimization Fund would constitute the account owner’s one allowable investment change and would prohibit them from making any additional investment changes for the remainder of 2004.