Financial Planning Blog

Investors saving for college through various state 529 plans were shocked earlier in 2008 when they suffered substantial losses in funds that were billed as conservative alternatives. Last April the state of Oregon filed suit against OppenheimerFunds in response to the poor performance of their Core Bond Fund. The fund, which was a critical fixed income component of the Oregon 529 plan's age-based portfolios, managed to lose almost 36% in 2008, compared to the Barclays Aggregate Bond Index which gained over 5% during the same period.

Yesterday, the State of Oregon announced a settlement in the lawsuit which will have Oppenheimer pay $20M to the Oregon College Savings Trust, partially compensating the 529 plan participants. Oregon had sought damages of $36M, but as they pointed out in their press release, a quick recovery of almost 60% is much better than the average recovery of about 3% of investors' losses in class action securities litigation. The $20M will be distributed among about 45,000 account holders according to their investments in the bond fund. This works out to an average of almost $450 per account.

According to the Wall Street Journal, at least five other states with similar 529 plan holdings are seeking compensation from Oppenheimer, including Illinois for $77M. Although Oppenheimer has apparently not admitted any wrongdoing, you would expect additional settlements in the future.

The moral of the story is that even conservative investments like bond funds have risks--sometimes more than we expect. Many investors were doing "all the right things", like placing their money in the most conservative age based portfolio while their children were in college, and still got burned. Fortunately for the investors in Oregon (and other states), they had the power of their attorney general and treasurer to press their case.