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Thursday, July 09, 2009
Let New Mexicans Make the Call on Investments
By Jim Scarantino
For the Journal
In my last column I discussed the New Mexico Higher Education Department's dereliction in administering the state's college savings plans. For months after serious problems became apparent in Oppenheimer funds promoted as safe for college savings, NMHED sat on its hands. Only after the mutual fund rating company Morningstar blasted NMHED's conduct did the state begin to wake up.
Since then I have received many e-mails from distraught parents and grandparents. They saved and invested for decades only to see their funds almost halved in value in a couple months. Some viewed NMHED's selection of Oppenheimer as sole manager of their investments to be an endorsement of Oppenheimers' abilities. Then they watched helplessly as “conservative” and “ultraconservative” bond funds took the same sickening nosedive as aggressive stock funds.
Before the 2008 market collapse, one 77-year old grandmother wrote the Secretary of Higher Education and others in state government begging for a college plan invested in stable CDs and money market instruments. She had researched other state plans and found they permitted families to choose from a number of fund managers. New Mexico, on the other hand, gave a monopoly to Oppenheimer. This savvy grandmother tried vainly to educate state officials about the relatively high expenses and risks of Oppenheimer's funds. She never received a response to her letters. Had state officials heeded her words, many families would have been spared disastrous losses.
I asked NMHED why it will not let New Mexico families invest in the low-cost funds available in other states. The response I received suggests the state is not the least bit bothered that New Mexicans must pay more than residents of other states for similar college investment products. “We believe we are competitive,” a spokesperson designated by NMHED informed me.
Maybe that's good enough for government work, but New Mexicans deserve better. Ohio, for instance, offers a stock index fund that charges annual expenses of only .19 percent. A similar investment in New Mexico's plan charges .72 percent. We have been paying our Secretary of Higher Education about a quarter million dollars a year, substantially more than the federal government pays the Secretary of Education of the entire United States. The higher expenses in New Mexico's college plan might seem insignificant to someone in such a lofty income bracket. But for average New Mexico families, who earn a fifth of that grand paycheck, those higher expenses translate into meaningful losses.
Say grandmom invests $5,000 at her grandchild's birth. She wants to invest in a simple stock index fund. Under New Mexico's plan, she will have paid $1,740 in expenses by the time her grandchild enters college. In Ohio, she will pay only $480. The difference equals a $1,260 graduation present that went to a financial firm instead of a New Mexico high school graduate.
Or consider a family setting aside money on a budget. If they invest $1,000 annually over 18 years in the same fund as grandmom, in Ohio they will incur $679 in fees. In New Mexico, they will be out $2,490. The difference would buy a nice laptop and a lot of textbooks.
NMHED determines the investments that qualify for the state's tax benefits. Every dollar invested in these higher cost funds is deducted from taxable income. So not only is NMHED denying New Mexicans the lowest cost options for college savings, the corresponding reduction in state revenues is subsidizing higher profits for Wall Street.
That diligent grandmom was on the right track. Give New Mexicans the same choices available in other states. Let them choose among fund managers, and include the very lowest cost option in the mix. The bureaucrats who have been making mistakes haven't suffered the consequences of their bad calls. There's every reason to believe that New Mexicans with their own money and dreams at risk can do a much better job.
Jim Scarantino spent 25 years practicing law, including time as a prosecutor in Philadelphia and New Mexico. He concluded his legal career as the ACLU-New Mexico's lawyer of the year in 2006. Scarantino also served as executive director of the New Mexico Wilderness Alliance and Republicans for Environmental Protection. He currently writes a monthly report for the Rio Grande Foundation. E-mail: jimscarantino@gmail.com
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