Those inside the fund industry have long complained that states are more concerned with profiting from their 529 college savings programs than they are in doing right by investors. Now there is some public proof of the matter.

According to a Wednesday article in USA Today, the paper found after a review of meeting minutes and interviews with board members for the Wisconsin College Savings program that they were more interested in gathering assets for the program than in the woeful investment performance of their funds. The paper also reports that the board was fixated on the $3 million in fees generated by the plan thus far.

That may not come as a surprise to the many fund firms that have been squeezed by 529 programs during the past three years.

The paper delved into the plan's operations because of the brewing scandals at Strong Capital Management, the plan administrator.

It turns out that Strong Capital Management was able to go to the college savings plan board and negotiate a better deal as recently as last April.

At that time Strong proposed what it called a revenue neutral change to its contract that would drop the fees it paid to the state for being able to run the program by $643,137. The new deal also boosted fixed payments to Strong by $307,200. In exchange, Strong reportedly agreed to drop revenues from deferred revenues.

The board was able to agree to the changes because it had built up a $2 million reserve in its fund use to pay for oversight of the program.

The paper also notes that while the plan was able to build its reserve, Strong was charging plan investors more than the targeted fund expense ratio of 100 basis point on one of the funds. It turns out that the Aggressive Portfolio now carries 119 bps. in expenses. Meanwhile, the Moderate Portfolio carries expenses of 102 bps.

Strong and distribution partner American Express claim that they charge the higher fees because the program does not yet generate enough revenue to cover their costs, according to the paper.  

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