January 17-18, 2002

ITEM 114-105-R0102 Montana Family Education Savings Program; Program Enhancements

THAT: The Board of Regents of Higher Education authorizes the expansion of investment choice in the Montana Family Education Savings Program through the addition of mutual fund investment options available through College Savings Bank/Pacific Life.

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.

Since 1998, CSB, as MFESP manager, has offered solely its CollegeSure CD, a certificate of deposit indexed to college costs and guaranteed to meet future tuition, fees, room and board. It is backed by the full faith and credit of the U.S. Government up to $100,000 per depositor. The CollegeSure CD paid 5.20% for the twelve months ended July 31, 2001. At 2001 calendar year end, CSB has established over 3,500 MFESP accounts and $28 million in deposits.

The 2001 amendments to the Act in part direct the Oversight Committee to address the differing needs of contributors regarding risk and potential return while minimizing state and administrative costs and burdens due to the addition of multiple investment instruments. Recent IRS proposed rules have provided more latitude regarding investment flexibility.

On July 18, 2001, the Oversight Committee met and unanimously recommended that CSB provide additional investment choice in the MFESP. In October 2001, CSB agreed to be acquired by Pacific Life. The merger with Pacific Life provides the means to offer additional investment options. On November 30, 2001, the Oversight Committee unanimously recommended to the BOR that the MFESP incorporate the program enhancements proposed by CSB and Pacific Life.

Pacific Life

Pacific Life was founded in Sacramento, California in 1868 by Leland Stanford, Charles Crocker and Mark Hopkins. The company provides life and health insurance products, individual annuities, mutual funds and group employee benefits, and offers to individuals, businesses and pension plans a variety of investment products and services. Over the past five years, the company has grown from the 23rd to the 14th largest life insurance company in the nation. (Townsend & Schupp Company, based on 12/31/00 assets). The Pacific Life family of companies manages more than $345 billion in assets, making it one of the largest financial institutions in America, and currently counts 81 of the 100 largest U.S. companies as clients (compiled by Pacific Life using 2001 Fortune 500 list).

Pacific Life began offering mutual fund products with the introduction of the Pacific Select Fund in 1988. Pacific Select Fund is the underlying mutual fund investment in Pacific Life's variable annuity and variable life insurance products and currently has over $18 billion in assets under management.

Pacific Funds

Pacific Funds is a family of 14 "best of class" mutual funds that offers nine well-recognized names in money management, all under one roof. Pacific Life is the adviser to Pacific Funds and hires the subadvisers for the funds.

529 Plan Investment Options

For the 529 Plan market, Pacific Funds offers 14 individual mutual funds as well as five asset allocation models, developed with Ibbotson Associates.

Pacific Life selects money managers that have a major presence in the institutional arena and historical performance that places them among the top one-fourth of their peers. Potential managers are also screened for strong name recognition, competitive fees and client service quality. The 14 funds available within Pacific Funds are:

  • PF AIM Blue Chip
  • PF AIM Aggressive Growth
  • PF INVESCO Health Sciences
  • PF INVESCO Technology
  • PF Janus Strategic Value
  • PF Janus Growth LT
  • PF Lazard International Value
  • PF MFS Mid-Cap Growth
  • PF MFS Global growth
  • PF PIMCO Managed Bond
  • PF Pacific Life Money Market
  • PF Putnam Equity Income
  • PF Putnam Research
  • PF Salomon Brothers Large-Cap Value

Portfolio Optimization

Portfolio Optimization provides asset allocation within the Pacific Funds 529 Plan account. There are five Portfolio Optimization models, which range from conservative to aggressive depending on the mix of asset classes (cash, bonds, large-cap stocks, mid-cap stocks, international) in the models.

The account owner can invest in Portfolio Optimization one of two ways: (1) By completing a profile questionnaire that addresses financial needs, time horizon and willingness to accept risk, the account owner will be matched with a suitable diversified model. The model will be automatically updated each year, or can be changed annually according to the owner's wishes. (2) The account owner can invest in one of the models based on the age of the beneficiary. As the beneficiary nears matriculation, the investment can be changed automatically or at the account owner's discretion to more conservative models to preserve capital.

Portfolio Optimization was developed by Pacific Life and Ibbotson Associates, based on the work of economist and 1990 Nobel laureate Dr. Harry Markowitz. The process applies investment methodology, including historical asset performance and attribution analysis, to determine a model that is consistent with a particular level of risk. Ibbotson conducts the analysis each year to keep the risk/return profile of the models consistent.

Investment Minimums

The minimum investment into the 529 Plan is $500 per fund, or $50 per fund if systematic deposits are established for at least one year.

Share Classes

Pacific Funds provides the choice of three share classes Class A, Class B and Class C shares to market the funds through broker/dealers and financial planners nationwide. Each class is subject to different types and levels of sales charges and bears different levels of expenses. Class A shares have a front-end sales load; Class B a back-end load; and Class C a level load. All sales charges and expenses are fully disclosed in the Pacific Funds prospectus delivered to the investor prior to any purchase.

For the Montana Family Education Savings Program, Montana residents can purchase Class A shares directly without paying the front-end sales charge. The waiver of the sales charge is a substantial subsidy made available by Pacific Life to Montana families. For instance, $10 million of funds purchased directly will save MFESP investors up to $550,000. Montana residents may also purchase Pacific Funds through a broker/dealer or financial planner who can assist them in the investment selection process and in understanding how a college savings plan can be incorporated into their overall financial plan. If purchased with the help of a broker/dealer or financial planner, Montana residents will pay the applicable front-end sales load.

Distribution

Pacific Life's extensive distribution network will reach more Montana families, as well as help grow assets in the Montana Family Education Savings Program. Pacific Life has a presence in the state of Montana through selling agreements with 54 broker/dealers and 239 registered representatives, including D.A. Davidson & Co., S.G. Long & Company, Investment Centers of America, U.S. Bancorp/Piper Jaffray, and NFP Securities.

Pacific Life has distribution agreements nationwide with 970 broker/dealers and over 60,000 registered representatives, including NASD firms (52% of sales), Regional/Wirehouse firms (35% of sales) and Financial Institutions (13% of sales). Total sales were over $4.8 billion in 2000 and $3.6 billion for 2001 (YTD through 9/30/01). This national distribution creates economies of scale, which enables Montana residents to directly purchase Class A shares without the front-end sales charge.

Summary

The addition of the Pacific Funds to the MFESP offers many benefits to Montana families and the state. The program now will not only have a guaranteed option, the CollegeSure CD, but also provide a wide array of "best of class" mutual funds. Pacific Life/CSB will underwrite all administrative and marketing costs. Such a turn-key approach minimizes the administrative burden on the state especially relating to management and tax reporting. It fully complies with the Act and the 2001 amendments. The MFESP will be Pacific Life/CSB's flagship 529 program.