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Thursday, June 25, 2009

State Acts to Fix Problems With College Savings Plan

By Jim Scarantino
Of the Journal
      If you've been laying awake worrying how your losses in New Mexico's college savings plans might keep your child from getting the education they need, here's some hopeful news. Help is on the way.
       New Mexicans who want to take advantage of the state's tax deduction for college savings have been required for the past several years to invest in Oppenheimer funds selected by the New Mexico Higher Education Department. But the tax advantages have been negated by the unsatisfactory performance of these funds. If you're among those who have been losing gobs of money in these investments, you've probably been using much stronger language to describe your experience.
       A Jan. 11 article by the Journal's Winthrop Quigley revealed how what was supposed to have been a “conservative” bond fund lost 40 percent because of Oppenheimer's huge, reckless bets on toxic mortgage-backed securities and other derivatives. At the same time, what should have been the relatively safe Oppenheimer government bond fund had been pouring clients' money into non-government debt that collapsed.
       Morningstar, the widely followed mutual fund rating company, has continued to excoriate the Higher Education Department's performance and the Oppenheimer funds it mandated for New Mexico investors. On May 31, Morningstar reported “the state acted slowly” to address Oppenheimer's failures. “It took until March 2, 2009 — months after it became painfully clear these investments were deeply distressed — for the state to replace” Oppenheimer's tottering bond fund “with a capable fixed-income option.”
       Even now, Morningstar reported, one of the state's college saving plans still has exposure to Oppenheimer's bad bond fund, “a fund in which we have little faith.” Morningstar added, “We're also concerned that existing shareholder money is still tied up in the worst offender (the bond fund that bet on derivatives).” Until more changes are made in New Mexico's 529 plans, Morningstar advised, “we'd steer clear.”
       That's not usable advice for New Mexican families with no other options. But major changes are under way, says Robert Desiderio, vice chair of the Education Trust Board, which advises the NMHED on its college savings plans. The Oppenheimer funds have been replaced with conservative and lower-cost alternatives. All new investments will go to these funds. Efforts are under way to shift existing investments away from Oppenheimer products. And, in what may be soothing news for bruised investors, a settlement between the state and Oppenheimer is “getting close.”
       New Mexico, Maine, Nebraska, Illinois and Texas, are in negotiations with Oppenheimer to recover losses in imprudent fixed-income investments. A June 21 report in Investment News describes what could be a settlement amounting to hundreds of millions of dollars. The settlement would be “unprecedented” and large enough it could hurt Oppenheimer's bottom line. But it is a price Oppenheimer is willing to pay to regain its reputation and restore confidence in the industry.
       We have a new Secretary of Higher Education. Peter White has replaced Reed Dasenbrock, who moved on in March to a job in Hawaii. Whether this leadership change accounts for these developments, it's hard to say. It certainly seems the wheels have been turning the right direction in recent weeks. Regardless of who deserves the credit, it feels good to write something positive about state government.
       Morningstar leveled one more criticism. Last September, New Mexico moved a majority of allocations into index products. Indexes essentially sample the entire market instead of gambling that individual managers can outsmart the rest of the world. The strategy works over the long run, the time frame for most families saving for college. The major consideration becomes cost. That's where Morningstar faults NMHED. Its index choices are nearly four times more expensive than similar products available to families in other states.
       Desiderio says he wasn't aware of this problem, but promised to look into it. Let's hope the good news keeps coming.
       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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