Updated: May 3, 2013 12:14PM
Originally published: August 7, 2001
If you’re saving for college for your children, you now have two special plans for Illinois residents. But your choices aren’t as good as they might have been if the state treasurer’s office had a little more investment savvy.
The State of Illinois is promoting its Bright Start College Savings program--a companion to the popular CollegeIllinois prepaid tuition savings program.
While CollegeIllinois guarantees your fixed amount of savings will build up to a guaranteed tuition payment, the new Bright Start plan is an investment alternative with the opportunity to build a larger college savings fund--but no guarantees about the result.
Both plans are part of the Federal Section 529 tax laws that allow states to offer incentives for college funding. But while CollegeIllinois is meant for state residents, the college investment plans now sprouting around the country are open to residents of any state.
That gives parents a wide choice of plans--a choice that’s particularly important because, by law, the plan’s investment adviser has complete control over how the contributions are invested.
That’s where state Treasurer Judy Baar Topinka’s office missed the mark. The investment adviser for the Illinois plan is SSB (Salomon Smith Barney) Citi (Citibank) Asset Management. There are four funds chosen for the equity plan investments.
According to Morningstar, the mutual fund rating company, three of the four investment choices fall near the bottom of the pack for past performance.
Morningstar gives out both a “star” rating (five is tops) for all mutual funds and a ranking against other funds in the same category (top ranking is 1, bottom ranking 100). Checking in at the Morningstar Web site, any investor could see how the funds rank:
* The Smith Barney Large Cap Value Fund has only a 2-star ranking and a one-year rating of 81--in the bottom 20 percent of funds in this category. For a 10-year period, this fund ranks 77--nearly in the bottom 20 percent of funds with similar goals.
* The story is similar with the Smith Barney Large Cap Growth Fund. Because the fund is much newer than the Large Cap fund, it doesn’t have a long enough track record to get a star rating. Started in mid-1997, it has a one-year ranking of 82, putting this fund also in the bottom 20 percent of funds of its style.
* The Smith Barney Small Cap Blend fund is given only two stars by Morningstar, and its one-year ranking is 53--in the middle of the pack.
* Only the fourth fund, the Smith Barney International Equity fund, gets a better than average ranking of four stars and 33 in its category. (The actual Bright Start funds will be clones of the funds rated on the site.)
John Reckenthaler, research director of Morningstar, said, “These are far down any reasonable list of funds to select. The decision must have been made on more than investment merits.”
Ed Giltenan, a spokesman for SSB Citi Asset Management Group, disagreed. “These funds have offered reliable, consistent and competitive performance over various time periods, and are run by seasoned, experienced fund managers,” he said.
Couldn’t the treasurer’s office find better investment managers? Fidelity manages $484 million in a similar fund, called the Fidelity Unique College Savings Plan (800-544-1722). It’s based on the New Hampshire state plan, charges a maximum annual fee of 1 percent, and is open to all. Investment portfolios are designed based on the child’s age and the years until the money will be required for college.
TIAA-CREF (877-697-2837) manages $409 million in a plan for New York State residents, similarly available to all. Its fees are capped at 0.65 percent annually.
For a complete listing of all state college savings plans, you can go to www.collegesavings.org.
Meanwhile, SSB-Citi is just getting started in the Section 529 college investment plan business. Illinois will be its second large state plan, after the Colorado plan started in October that now has $30 million in assets.
Fees are capped at a competitive 99 basis points--just under 1 percent. The plan offers investors a choice of portfolios for their deposits--although they cannot switch between them. Their “equity” portfolio includes the four funds noted above.
Martin Noven, inspector general for the state treasurer’s office, defended the SSB-Citi fund choices as part of an overall winning package. He said he sat in on the procurement and decision-making process. He pointed to the low level of fees and the fact that any penalities levied on investor withdrawals not used for college will be returned to the overall fund.
Noven’s main point was that the SSB-Citi plan gives power to the treasurer’s office to work with SSB-Citi to remove funds that are underperforming, instead of just “handing over” funds to an investment manager. But Topinka’s office started with underperforming funds!
When I asked what expertise she had in choosing investments, Noven pointed to the $11 billion in the state investment portfolio supervised by the treasurer’s office. But none of that money is invested in stocks. Noven said the state is considering hiring someone to monitor the SSB-Citi funds’ performance on a quarterly basis.
He could have saved some money by going to the Morningstar Web site.
It’s a shame that Illinois residents who want to join the state plan so they can benefit from the waiver of state income tax on withdrawals have such a mediocre group of investment choices. Even if investors choose the Illinois plan to avoid state income taxes on the ultimate withdrawals, that small tax benefit is hardly going to make up for years of subpar investment growth.
Of course, as all mutual fund prospectuses say: “Past performance is no guarantee of future results.” But I’d prefer placing my money on a long-term winner, instead of starting out with a handicap.
And that’s the Savage Truth.
Terry Savage is a registered investment adviser for stocks and commodities and is on the board of directors of McDonald’s Corp. and Pennzoil-Quaker State Co. Send questions via e-mail at firstname.lastname@example.org. Her third book, The Savage Truth on Money, recently was published by John Wiley & Sons Inc.
October 28, 1999