Relates to investment standards for investments of the New York State college choice tuition savings program and the New York achieving a better life experience (ABLE) savings account program.
NEW YORK STATE ASSEMBLY MEMORANDUM IN SUPPORT OF LEGISLATION submitted in accordance with Assembly Rule III, Sec 1(f)
BILL NUMBER: A9281
SPONSOR: Glick TITLE OF BILL:
An act to amend the state finance law, in relation to the investment
standard for investments of the New York state college choice tuition
savings program and the New York achieving a better life experience
(ABLE) savings account program
PURPOSE:
The purpose of this legislation is to bring the New York State college
choice tuition savings program (NY 529) and the New York achieving a
better life experience savings account program (NY ABLE) in line with
investment standards of other states' programs throughout the country.
SUMMARY OF PROVISIONS:
Section 1 of this proposal amends section 78 of the state finance law.
Section 2 of this proposal amends section 99-x of the state finance law.
Section 3 of this proposal provides for an immediate effective date.
PRIOR LEGISLATIVE HISTORY:
S.6464 2019-2020
JUSTIFICATION:
This proposal seeks to eliminate the restrictive and costly investment
limitations imposed on both New York's 529 College Choice Tuition
Savings Program (NY 529) and 529-A Achieving A Better Life Experience
Savings Program (NY ABLE) pursuant to State Finance Law sections 78 and
99-x, respectively and replace such limitations with a prudent investor
standard.
State Finance Law sections 78 and 99-x direct the Comptroller, as Trus-
tee of both NY 529 and NY ABLE, to invest the assets of each program in
investments authorized by Article 4-A of the Retirement and Social Secu-
rity Law (Article 4-A), with certain exceptions_ Article 4-A governs the
investment of retirement and public pension fund assets in New York
State. This statute sets forth a legal list of permitted investments
(the legal list), with a corresponding maximum percentage of total fund
assets which may be ascribed to each investment type.
However, neither NY 529 nor NY ABLE are defined benefit retirement or
public pension plans; rather, shares of each program are characterized
as municipal fund securities, intended to be used for higher education
and disability-related expenses, respectively. While the State makes
investment decisions on behalf of members and beneficiaries of public
pension funds, NY 529 and NY ABLE account owners make their own invest-
ment decisions, choosing from among a menu of options offered by each
Trust, which are designed to track increasing costs of higher education
or disability-related expenses. Unlike public pension funds, in which
assets of all members and beneficiaries are pooled, each account in NY
529 and NY ABLE is segregated from all other accounts, and customized
reports based on an account owner's chosen investment options are
provided for each account, indicating an account owner's contributions,
distributions and ending value. And, while public pension funds are
defined benefit plans, neither NY 529 nor NY ABLE are guaranteed by the
State. Similar to retail investment products, investments in each
program may lose value. Given the very different operational model of NY
529 and NY ABLE, along with different investment goals and time horizons
as compared to public pension funds, Article 4-A is not an appropriate
investment framework to impose on these programs.
For example, Article 4-A restrictions on the amount of exposure to
international investments, currently 10%, now conflict with prudent
investment policy supported by economic indicators and investor demand.
Various categories of investments offered by NY 529 currently exceed the
maximum percentages allowed by the legal list, forcing these assets into
the basket. As a result, NY 529 has been unable to implement allocation
recommendations for both international equity and international fixed
income made by its Direct Plan Investment Manager, The Vanguard Group,
Inc. (Vanguard), because there is currently insufficient room left in
the basket. New York administers the largest Direct-sold 529 plan in the
United States, but due to Article 4-A restrictions, is the only 529 plan
which was unable to apply Vanguard's recommended increases in interna-
tional equity and fixed income.
This Article 4-A investment restriction was also cited as the reason the
NY 529 Direct Plan was downgraded in 2017 by Morningstar (an investment
rating organization charged with reviews, rates and reports on 529 plans
nationally) from a silver rating to a bronze rating. In fact, Nevada's
Vanguard Plan, which has higher fees and fewer assets under management
compared to NY 529, has received a gold Morningstar rating, a rating two
levels above that of the NY 529. The only significant difference between
the two programs' investment offerings is the higher international equi-
ty and fixed income allocation in Nevada, which the NY 529 Direct Plan
is unable to implement due to the Article 4-A investment restrictions.
More importantly, the Article 4-A investment restrictions prevent NY 529
from offering the best investment array to over one million program
participants for whom the Program has a fiduciary responsibility.
The elimination of misaligned investment constraints imposed by Article
4-A and replacement with a prudent investor standard will allow New York
State to offer a best in class menu of investment options to account
owners in both NY 529 and NY ABLE.
FISCAL IMPLICATIONS FOR STATE:
This change would be revenue-neutral to the State of New York.
EFFECTIVE DATE:
This act shall take effect immediately.
