January 16-17, 2003

ITEM 118-108-R0103 ATTACHMENT

Revisions to Policy # 950.2 -- Montana Family Educations Savings Program

Explanation of Changes:

Introduction

The proposed changes in Policy 950.2 can be divided into several broad categories:

  •        Changes eliminating the use of the term "depository."
  •        Inclusion of provisions to reflect subcontract arrangements through which additional college savings products are offered under the program.
  •        Changes in the maximum account balances.
  •        Changes conforming the policy to current practice.

The explanation below of "policy-wide changes" describes two changes that are made throughout the policy--the deletion of the term "depository" and the insertion of the term "investment manager." The section-by-section explanation below provides explanations for the changes proposed in each section, other than the policy-wide changes.

Policy-Wide Changes

Substitution of Manager The proposal eliminates most uses of the term "depository" because the enabling legislation and the current policy define "depository" as "manager" and vice versa. The use of the term "depository" in some places and "manager" in others is potentially confusing (particularly in light of some of the other proposed changes). Using only one term "manager" makes for a more readable and less confusing policy.

The proposal adds a definition of investment manager. An investment manager is a financial institution, investment adviser or mutual fund that, in accordance with arrangements approved by the Board, offers college savings products approved by the Board, through a contract or other arrangement with a program manager. The proposal inserts "investment manager" in a number of different places in the policy to facilitate the application of the policy to the offering of additional college savings products.

Section-by-Section Explanation

II(A)(13) A definition of investment manager is added for use elsewhere in the policy. The definition includes a cross-reference to section III(J), which describes the role of an investment manager.

III(A)(2) The policy now imposes a $50 fee on changes in the designated beneficiary of an account after a first change. This provision was intended to discourage frequent changes of designated beneficiaries and compensate for the administrative costs of recording changes in designated beneficiaries. In some cases the costs and burden of collecting a $50 charge may be greater than the charge itself. The proposed change allows, but does not require, a manager or investment manager to impose the $50 charge.

III(A)(3) The policy now imposes a $50 fee on changes of account owner after the first change. Changes rarely occur and when they do, they usually occur because of a death or divorce. In some cases the costs and burden of collecting a $50 charge may be greater than the charge itself. The proposed change allows, but does not require, a manager or investment manager to impose the $50 charge.

III(A)(4) The proposed changes relate solely to capitalization of the title of the section.

III(A)(5) The Board has permitted an investment manager to charge a $25 annual account maintenance fee for some accounts. The provision clarifies that as policy a fee can be charged. The Board would have to approve any such fee as part of its approval of a college savings product.

III(C)(5)(f) The reference in the current policy to "investment strategies" is slightly confusing and does not conform with terminology used elsewhere to describe alternate college savings products offered under the program. Therefore, the proposal deletes the reference.

III(D)(3) While the Internal Revenue Code continues to prohibit the indirect or direct direction of investments, the Internal Revenue Service has published guidance that interprets the prohibition on direction of investment in a way that arguably permits some investment direction. The proposal adds a sentence to clarify that the Policy's prohibition, which tracks the Code, should be interpreted in a manner consistent with the IRS's interpretation of the Code.

III(E)(4)(c) In the last year, the Internal Revenue Service has issued private letter rulings approving state section 529 programs that have account balance limits in excess of the safe harbor limits included in proposed Treasury Regulations and in excess of the limits currently in effect for the Montana Family Education Savings Program. The Oversight Committee and Board of Regents should consider whether they want to increase the MFESP account balance limits to better match the limits of programs that may compete with the MFESP.

The MFESP account balance limit is now equal to seven times the enrollment weighted average one year's undergraduate tuition, fees, room and board at independent 4-year higher education institutions as measured and last published by the College Board's Independent College 500 Index. The current account balance limit is $187,000.

In a recent private letter ruling, the Internal Revenue Service approved an account balance limit equal to seven times the tuition, fees, room and board at the most expensive undergraduate educational institution that is eligible for the program.[i] The Service also approved an account balance limit based on five times the tuition, fees, room and board charged by the average highest cost private colleges in New England and two times the tuition, fees, room and board of graduate enrollment at a high cost private university in New England.[ii]

The proposal includes a possible new limit for Montana equal to seven times the enrollment weighted average one year's undergraduate tuition, fees, room and board at the ten undergraduate institutions in the College 500 Index that have the largest "total direct charges" (i.e., the product of the school's undergraduate enrollment and its tuition, fees, room and board). The weighted average for the current year is $35,638, resulting in a possible account balance limit of $249,000.

III(F)(13) The Policy currently includes no provisions explicitly permitting a manager to terminate an account that has a low balance for an extended period of time. Low balance accounts are expensive for the manager and may exist mostly because the account owner does not take the necessary steps to terminate an account or to roll one account into another account. For example, an account owner may withdraw what he thinks is the entire account balance to pay qualified higher education expenses, but inadvertently leave $75 of market appreciation or interest in the account. The account could sit idle for several years, while the manager continues to generate reports and mailings related to the account.

The proposal would permit a manager to terminate an account if the balance or fair market value of the account remains for six months below the minimum deposit required for an account owner to open an account with a check (e.g., $250, for CollegeSure CDs). Before terminating an account, the manager would have to give the account owner 30 days notice, advise the account owner of the account owner's options (e.g., rollover or increase the balance of the account), and advise the account owner of the possible adverse tax consequences of terminating the account.

III(H)(2) The Policy currently requires that any offering or disclosure material, published advertisement, deposit slips and other similar forms and documents relating to the program include a statement that an account is not insured by Montana. The proposal better conforms the Policy on the "not insured" statement to the language in MCA 15-62-206(3) for several reasons. First, the Policy does not now identify two key documents (contract and application) that the enabling statute requires to include "not insured" language. Second, numerous forms and documents are generated in connection with the program. It is difficult for the program manager to determine which forms are "similar forms" that require the "not insured" notice. Third, little benefit is achieved by repeating the same warning time and time again. It is best to put the warning in the places that are most relevant to persons opening section 529 accounts, such as the application.

III(J) Section III(J) is proposed to better reflect the offering of additional college savings products through agreements that a manager may enter into with an investment manager (i.e., an investment adviser, financial institution or mutual fund).

Proposed Section III(J)(1) would authorize program managers to enter into such arrangements. The details of the arrangement would have to be disclosed to the Board in connection with the Board's decision to permit the additional college savings product to be offered.

Proposed Section III(J)(2) states, that with certain limits, an approved investment manager may assume certain obligations of the manager under the policy with respect to accounts invested in products under the direction of the investment manager. This will enable an investment manager to accept deposits and permitted investment direction instructions, send statements to account holders, and undertake other administrative tasks that policy requires the program manager to undertake.

Proposed Section III(J)(3) clarifies that despite any delegation to an investment manager, the program manager remains liable for its obligations under its contract with the Board and that the program manager remains responsible for ensuring that the program is operated in compliance with the enabling statute and the policy.

[i] PLR 200214032 (December 19, 2001).

[ii] PLR 200232035 (May 16, 2002).