If you’re an Illinois (among other states, see Note below) parent of a child heading to college or already in college, then you may already be painfully aware of the “Oppenheimer problem” that the BrightStart 529 plan has encountered.
Briefly, one of the Oppenheimer mutual fund choices (formerly) available as an allocation option in the BrightStart 529 plan (Illinois’ plan, see Note below for other plans affected) was the Champion Income fund. Last fall, during the market downturn, this particular fund experienced a 79% freefall. Another option, the Core Bond fund, experienced a 36% drop. These are astounding numbers, given that peer funds only experienced an 8% drop during the same period.
These two funds are part of a grouping that is typically conservative in nature, not given to wild swings in the market (up or down) – and as such, parents who chose these funds as a part of their allocation for 529 savings were expecting a conservative growth diversifier when choosing these funds. Unfortunately, Oppenheimer funds’ management had decided to drink the kool-aid of investing in the extremely risky mortgage security derivatives that have become the poster child of the economic meltdown we’ve been experiencing.
Thus far, Oppenheimer has admitted no wrongdoing, but rather has indicated that it acted appropriately in managing the funds.
Illinois Treasurer Alexi Giannoulias is leading an effort to resolve this situation, which reportedly has cost Illinois families as much as $85 million, by negotiating with Oppenheimer. Thus far, Oppenheimer has admitted no wrongdoing, but rather has indicated that it acted appropriately in managing the funds. Giannoulias has indicated that he will sue the company if negotiation is fruitless.
How We Can Keep This From Happening Again
The biggest issue here is that there is very little oversight into 529 plan fund management. There are no federally-mandated cap on fees in these funds, and precious little oversight into the management of the funds. Since these funds are not the same mutual funds that are publicly traded, there can be some funky things going on with fee structures and investment management that isn’t as clear to the individual investor.
I believe the time has come to give these funds the same oversight and require the same disclosure as all other security investments. It’s costly enough to pay for college – families who save in these plans should deserve to know that their investments are held to the same high standard as all other investments.
Note: While the Illinois BrightStart 529 plan has been the headliner lately, several other states’ 529 plans have been hammered by the same two Oppenheimer funds: Maine (NextGen), New Mexico (Scholar’s Edge and Education Plan), Oregon (Oregon College Savings and Oppenheimer 529), and Texas (LoneStar and Texas College Savings). Legal action is pending for each state individually.
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I can learn from you, you can learn from me - please leave your comments and links!Jim Blankenship, CFP®, EA, is an expert in personal retirement, IRAs, and tax issues, with more than 25 years of experience in the industry. Read more from this author
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[...] to the RSS feed for updates on this topic.Powered by WP Greet BoxAs we previously discussed in this post, the Illinois State Treasurer, Alexi Giannoulias is taking Oppenheimer to task for it’s sins [...]