Nov. 14–Oregon ditched scandal-tainted Strong Capital Management as manager of the Oregon College Savings Plan on Thursday, saying it could have a better plan in place within two to five months.
Strong has been named by regulators in revelations of wrongdoing in the mutual fund industry that came to light in September and continue to unfold. The board that oversees Oregon’s tax-advantaged savings plans voted to terminate its contract with Strong at a special meeting in Portland.
State Treasurer Randall Edwards told the board he chairs that investors are confused and wondering whether they should pull their funds out of Strong’s Oregon College Savings Plan. Such plans allow parents or grandparents to invest in mutual funds while children are young and later withdraw the investments tax-free to pay for college.
Thursday, Edwards entered into the record 85 letters and emails from investors who are worried about their investments with Strong, a Menomonee Falls, Wis., mutual fund company with $42 billion in assets.
Oregonians have opened 26,000 accounts and invested $134 million in the Oregon College Savings Plan options managed by Strong. That money would be automatically transferred to similar-style accounts in a new plan.
The new plan would likely contain no-load mutual funds from several companies under one management umbrella. No-load means no commissions are paid to advisers who recommend a plan or fund. The new no-load plan could be administered by one of the two other managers Oregon already employs who operate on commission; or it could be an entirely new company.
Oregon’s other plans are operated by MFS Investment Management and Schoolhouse Capital, a division of State Street Bank, both of Boston.
Investors’ funds would be transferred into new funds representing the same investment mix as the one chosen in the Strong plan. The Strong plan offers five portfolios from aggressive to ultra-conservative and one index fund, an all-stock option which mirrors stock market performance.
Those portfolios mix Strong and U.S. Bancorp’s First American mutual funds to achieve their investment style. Strong enlisted U.S. Bancorp with a subcontract, so those funds also will disappear from the mix.
But more options than the current six might be offered, said Oregon plan director Michael Parker, including low-cost offerings from no-load companies such as Vanguard Group or TIAA-CREF.
Those names surfaced several times Thursday in testimony from investors in Oregon’s plan, who urged the board to select companies with lower fees and higher ethics than Strong.
“I pay 1.25 percent in fees to Strong for something you can get for 0.65 percent at Vanguard,” said Diane Mingo , a Milwaukie woman who is investing for her three grandchildren. While some investors pay loads, or commissions, all investors pay annual management expenses. The expense percentage can greatly affect total return.
“Please,” she told the board, “think of the ethics, think of the fees and think of the duty to your constituents.”
Federal law gives investors one chance per year to change investment options within the college plans, which offer tax deductions and tax-free withdrawals if the money is used for education. The initial transfer would not count in that tally, but switches made after the transfer would, Parker said.
New investors could put money into the new plan in as soon as two months. It might take as long as five months to transfer the Strong accounts to a new plan, Parker said, because 60-day notice is required to terminate the contract, and systems assuring the safe transfer of assets have to be tested.
Whatever the shape of the new plan and the schedule to implement it, the new offering must have safety, ease of access, lower cost and higher performance, said Edwards, who recommended the vote to terminate Strong’s contracts .
Other members at the meeting were Leslie Lehmann, Scott Sandbo and Richard Solomon. Member M. Lee Pelton was absent.
In discussing reasons for severing ties with Strong, Edwards said he thought the trust Oregon placed in Strong had been breached “up to the CEO level.”
Strong’s founder and chief executive, Richard Strong, is alleged to have made market-timed trades in his own funds that skimmed $600,000 in profits from other investors. The Strong company also is alleged to have allowed a hedge fund to conduct such trades even those its policies prohibit that form of quick, in-and-out trading.
Two other states, Nevada and Wisconsin, use Strong as a college plan manager. Strong said Thursday it still represents those two states.
Although losses to investors are estimated to be minimal, Oregon wants partners it can trust for the long term and needs a management firm that won’t be distracted by the scandal, Edwards said.
The board will meet again before Christmas to consider options.
“We should have a pretty strong recommendation in two to four weeks,” Parker said.
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(c) 2003, The Oregonian, Portland, Ore. Distributed by Knight Ridder/Tribune Business News.
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