Financial Planning Blog

You’re a couple of years away from sending your son or daughter to college and you’ve done everything “right”. You’ve saved diligently in your state’s 529 plan, placed your money into the conservatively managed “1 to 3 years to college” portfolio, and you then you watch in horror as your 529 account loses almost 30% in the last year. Would you be a bit upset? Apparently, a number of folks across the border in Oregon are, as are many in other states with 529 plans managed by OppenheimerFunds Inc.

The Wall Street Journal reported yesterday that the Oregon Attorney General has filed suit against OppenheimerFunds Inc. on behalf of the state treasurer to recover losses in the Oregon College Savings Plan. At issue is the abysmal performance of the Oppehheimer Core Bond Fund (OPIGX), which was a critical fixed income component in the five age-based portfolios in the Oregon plan. This intermediate bond fund lost almost 36% in 2008 and another 10% so far in 2009. Needless to say, this performance was far behind the Barclay’s Aggregate Bond Index which gained over 5% in 2008. So much for a conservative investment!

Oregon estimates that 529 plan participants lost at least $36M, and the suit alleges that Oppenheimer was negligent and breached its contractual and fiduciary duties. The state claims that the bond fund changed from a conservative fund to one investing in aggressive and risky securities including credit default swaps and other derivatives. "The Core Bond Fund was no longer a plain bond fund," the complaint says. "It had become a hedge-fund like investment fund that took extreme risks."

Oregon wasn’t the only state burned by OppenheimerFunds 529 plan management. Illinois is one of a handful of other states trying to negotiate a settlement with Oppenheimer due to the huge bond fund losses. An interesting note is that Illinois’ Bright Start Program was singled out by Morningstar in “The New Gold Standard Among 529 College Plans” in August ‘07 and still topped their 529 rankings in August ‘08. Apparently they missed the impending problem with the intermediate term bond fund selection.

I think a number of people—plan sponsors and individual investors—will be taking a closer look at their 529 plan investments, if they haven’t already.