(Dow Jones) The battle for managing 529 college savings plans is back on the front burner.

On Tuesday, Fidelity Investments turned up the heat by lowering fees. It will charge from .25% to .35% on its 529 index portfolio, down from .50%, and from .59% to 1.04% on its managed portfolios, down from .69% to 1.09%.

"That sends a message that, 'We're in this to stay, and we're going to maintain our market share,'" says Andrea Feirstein, managing member of AKF Consulting LLC in New York, which advises states and public authorities that administer 529 plans.

With 529 plans, named for a section of the Internal Revenue Service code, investors contribute after-tax earnings but can later withdraw that money to pay for higher education without paying any federal tax on capital gains or dividends. Investors sometimes receive other benefits if they invest in a 529 plan affiliated with their home state.

Vanguard and other providers lowered fees this year in individual plans, but Fidelity cut costs in all seven of its state-sponsored plans.

"We want to make sure we are competitive," says Joe Ciccariello, vice president, College Planning, Fidelity Investments. "Pricing is one component."

And an important one, "because when you're trying to discern differences between plans, it is very easy to compare prices," says Joe Hurley, founder of Savingforcollege.com LLC, a company owned by Bankrate Inc. that provides information about 529 savings plans on its Web site.

The fee battle has been smoldering since 2003 when New York surprised the 529 world by trading TIAA-CREF for Vanguard Investments. Many companies have since dropped the prices and increased the investment choices to win state contracts for the college savings plans, which are a growing business and important introduction for families to a financial firm.

"As the industry grows and matures prices will continue to go down," says Alba Martinez, a principal in Vanguard Group's Education Markets Group, which dropped fees slightly this year on plans in Arkansas, Nevada, Iowa and New York. It announced in November that as part of its renewed contract that it would cut fees on Colorado's Direct Portfolio College Savings Plan to .52% from .75%.

The Fidelity announcement grew out of its rebid for the Massachusetts plan. The next big battle will be in 2010 when New York rebids its plan. Vanguard voluntarily lowered fees on the $7.4 billion plan in 2009 to .49% from .55%, but New Yorkers will need to see much better terms or they may be tempted to move assets despite a generous state tax benefits.


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