Alexi: Dump Oppenheimer funds from Bright Start before you leave office
TERRY SAVAGE firstname.lastname@example.org Nov 4, 2010
Alexi Giannoulias came under criticism for not monitoring the Bight Start's Core Plus fund results more closely and for not acting more quickly to deal with the losses that took place over a six-month period.
Updated: May 3, 2013 12:13PM
My granddaughter is 18 months old. Her parents would like to start a college fund for her. I would like to either set up a separate one or contribute to whatever they set up. We all live in Illinois. Any advice would be appreciated.
A. This question was posted on my blog a couple of weeks ago, and I promised the reader an answer -- after the election.
I wanted to wait until after the election to respond because the Illinois Bright Start 529 College Savings Plan became the focus of a great deal of controversy during the election.
Investments in one of Bright Start's most conservative funds were mishandled by the fund manager, resulting in huge losses. State Treasurer Alexi Giannoulias was responsible for the management of Bright Start, and I have written a series of columns on the issue over the last year. I didn't want my opinions on the handling of Bright Start to be construed as politically motivated when they are not.
Bright Start's Core Plus fund was designed to be the safest of funds, for those nearing college age and seeking safety of principal. Instead, the fund managers from OppenheimerFunds invested heavily in risky mortgage-backed securities. When the mortgage market collapsed in late 2008, the fund lost $150 million of Illinois families' savings. Six other states also had college accounts invested in the fund, suffering similar losses.
Two years later, after a settlement led by Illinois Attorney General Lisa Madigan was reached with Illinois and the other states that had invested their college plans in the same fund, OppenheimerFunds paid back roughly 50 percent of the losses.
Giannoulias came under criticism for not monitoring the fund results more closely and for not acting more quickly to deal with the losses that took place over a six-month period.
By reaching the settlement, OppenheimerFunds tacitly acknowledged their wrongdoing.
But Oppenheimer remains on the roster of fund managers for Bright Start. And I think that's just plain wrong. I have publicly asked Giannoulias why he hasn't kicked OppenheimerFunds out of the management group for Bright Start. After all, they did agree to settle the lawsuit, although returning only half of the lost amount to shareholders. So, according to attorneys I consulted, the treasurer had plenty of grounds to dump OppenheimerFunds.
But nothing has been done to replace them.
Now, it's certainly possible to invest in the Bright Start plan without using any of the OppenheimerFunds choices. And Morningstar still rates the Illinois plan as among the best in the country, calling it "a solid choice for index-oriented investors." They note the plan has some of the lowest fees for its stock funds.
And there's another good reason to invest in the Illinois plan. You get a deduction on your state income taxes for up to $10,000 of your contribution on a single return ($20,000 on a joint return). The other tax break -- tax-free growth and withdrawal of the account to use for college expenses -- applies to college savings plans in all states.
So Illinois residents could easily invest in plans from other states. You can check them out at Morningstar.com -- or go directly to Vanguard.com or Fidelity.com and get applications for their low-cost plans, which were created for residents of other states.
On behalf of all Illinois investors in Bright Start, but specifically those who lost money in the Oppenheimer-managed fund, I once again call on Giannoulias to take one final action before he leaves office in January: Get OppenheimerFunds out of Bright Start!
Until that moment, I cannot and will not recommend the Bright Start Savings 529 plan.
You won't get the state income tax deduction for your contribution -- but you will be sending a message to Illinois' treasurer that it's time to take the bad guys off the Bright Start payroll. And that's the Savage Truth.
Terry Savage is a registered investment adviser.