Scandals taint college savings plans; investors may have to wait on changes
By JOHN KIMELMAN New York Times
Sunday, November 23, 2003
Over the last few years, investors’ biggest complaint about state- sponsored college savings plans was that they often generated weak returns or actually lost money in the bear market.
But the recent investigations into reports of improper trading practices at several mutual fund companies have given investors in these tax-sheltered plans a new worry.
Several fund companies implicated by regulators — including Putnam Investments, Menomonee Falls-based Strong Capital Management and Alliance Capital Management — are nationwide providers of these savings programs through extensive brokerage networks. And several fund portfolios that may have fallen victim to improper trading have been used in a variety of college plans, possibly affecting the returns of many savers, according to officials with several states and mutual fund companies.
Oregon recently fired Strong Capital as one manager of its college savings program after the New York attorney general, Eliot Spitzer, said he would take action against the company’s founder and chief executive, Richard S. Strong, for improper trading of shares for his own profit.
Other states are taking a slower approach, investigating trading practices and looking for ways to diversify their offerings by adding fund companies.
Many investment advisers say investors suffered little in returns, in part because most popular college portfolios include several underlying funds, not all of which were suspected of improper trading. Moreover, fund companies involved in the scandals have agreed to repay investors for any losses that resulted from improper trading.
But this comes as little comfort to financial planners, who worry that some investors will turn away from an otherwise sound way to invest for college.
“Saving money for college is difficult enough,” said Tom Davison, a partner at Summit Financial Strategies, a fee-based financial planning firm in Columbus, Ohio.
“This scandal could give investors one more reason to turn off from the whole college savings process, and that’s the last thing that families need to do.”
Over the last two years, state-sponsored college savings programs, known as 529 plans, after a section of the tax code, have been embraced by many Americans. The investments grow in a tax- sheltered account, and withdrawals are not subject to federal taxes as long as the money goes for education. In addition, when investors use plans based in their home state, they may be entitled to state tax advantages.
In the year ended Sept. 30, assets in these plans grew to $29.1 billion from $15.8 billion, according to the Financial Research Corp., a market research firm in Boston.
Many fund companies, including Fidelity Investments, the Vanguard Group and Franklin Templeton Investments, have formed partnerships with state governments to offer 529 plans.
Today, Alliance, through its partnership with Rhode Island, and Putnam, through its relationship with Ohio, are marketing their college savings offerings nationwide. Alliance and Putnam have emerged as two of the top five participants in the 529 marketplace, according to the Financial Research Corp.; Alliance had $3.7 billion in assets in the plans as of Sept. 30, and Putnam had $2.6 billion. Strong Capital, which has managed college savings plans in Wisconsin, Oregon and Nevada, has gathered about $1.2 billion in assets, the research firm said.
Martin J. Olle, program director for EdVest, Wisconsin’s college plan, managed by Strong Capital, said it uses the Strong Growth fund in three blended college savings portfolios. Spitzer, the New York attorney general, has asserted that the Strong Growth fund was used by a hedge fund to engage in improper frequent trading.
In a statement last week, Strong Capital said, “The important changes being made at Strong and those to come should give all investors, including our 529 plan clients, the confidence that they can maintain their relationships with our professionals.”
Unlike the officials in Oregon, those in Ohio, Rhode Island and Wisconsin are not seeking to end their ties to the companies that run their plans — at least for now.
Last week, it was announced that Wisconsin and Strong had agreed to bring in more funds to the EdVest program. Also, Wisconsin is looking for lower-cost alternatives to the Index, Aggressive, Bond and Balanced EdVest portfolios now offered by Strong Capital Management, the consultant hired on an emergency basis to find them said Friday.
