RD229 - Prepaid529 Investment Management

Executive Summary:
The investment management structure for Virginia529’s prepaid college tuition program, Prepaid529, is well defined and not unusual for an institutional investor of its kind. However, several factors warrant a reconsideration of the current structure and practices. The management structure of Prepaid529 has not changed since the fund was established, even though the fund has grown dramatically and added more complex investments. Prepaid529 is a public fund, so the state has a financial interest in fund performance, accountability, and transparency.

Prepaid529 investment returns have underperformed relative to benchmarks in recent years. A third-party review of benchmarks would help determine whether existing benchmarks are appropriate or whether there is a need to reconsider investment decisions and practices. Within the current management structure, adding an Investment Director position to Virginia529 would promote accountability for fund performance and improve fund management and governance. Responsibility to manage Prepaid529 investments should not be transferred to the Virginia Retirement System or the Department of Treasury because fiduciary and governance concerns, as well as other challenges, outweigh the benefits of such an arrangement.