The ScholarShares Investment Board in California, which runs the 529 plan, has announced that it will shut down the ScholarShare plan sold through brokers and financial advisers because it didn't manage to find a manager.

The adviser-sold plan has to be closed, for the Board was not able to find a manager that could deliver a competitive plan for our account holders, according to a statement by California's Treasurer Office's Spokesman Joe DeAnda. 

Next spring, accounts in 529 plan will be shifted automatically into the much bigger ScholarShare plan sold directly to consumers, which will soon experience a transformation too.

Only two companies (TIAA-CREF and Union Bank & Trust of Nebraska) participated in the bidding for the direct-sold plan, which has about $3.85 billion in 277,343 accounts. The TIAA-CREF won the bid at last and it will start the plan on Nov. 7.

Meanwhile, no companies tried to take over the adviser-sold plan that has $283 million in 22,565 accounts.

Different from Fidelity Investment, which offered only Fidelity funds in the ScholarShare plan, TIAA-CREF will offer not only its own funds, but also ones from other companies such as T. Rowe Price, DFA and Pimco, according to Joe DeAnda. The information about which companies will be running which funds hasn't been revealed yet and won't be released till the transition takes place.

Investors' money in the Fidelity Funds, which is under the adviser-sold plan now, will automatically be transferred into new funds. If investors do not like the new funds, and they have not switched their money among funds this year, they can request a transfer to different ones. However, if they have switched their money among funds, they will get no access to request a transfer, because Federal law permits only one such transfer per calendar year.

The state treasurer's office tried to maintain the adviser-sold program, but it was not able to find a company willing to manage it.

A request for proposals ... received no bids. Subsequent efforts to find a suitable partner to keep the adviser-sold plan operating did not succeed, the ScholarShare board said in a news release.

The decision to drop the adviser-sold plan was a difficult one and made only after ScholarShare made a concerted effort to keep it going, DeAnda said in a statement. In the end, we were not able to find a manager that could deliver a competitive plan for our account-holders, and we felt the best option was to transfer them to our direct-sold plan.

Most investors will pay lower fees as a result of the change. Today annual fees range from 0.25 percent to 1.06 percent of assets, depending on which fund they select. But the fee will range from 0.18 to 0.62 percent after TIAA-CREF take over the plan. More and more advisers are recommending in-state direct-sold plans to their clients.

Twenty-three percent of advisers recently surveyed by Financial Research Corp claimed that they were always telling their clients to invest in-state direct 529 Plan, while 49 percent said they sometimes do so.