OppenheimerFunds' tentative deal seen as plus for 529 plans

Settlement could restore confidence in industry

Jun 21, 2009 @ 12:01 am

By Charles Paikert

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A settlement being hammered out between OppenheimerFunds Inc. and five states whose Section 529 college savings plans lost money in the firm's Core Bond Fund could pave the way for investors to recover some of their losses, and that would be a shot in the arm for the ailing industry, according to observers. “I think the settlement will help rebuild the reputation of 529 programs in general, and Oppenheimer in particular,” said Bridget Beardon, a research analyst for Boston-based Financial Research Corp. “Program managers will have to be that much more cautious about investment options, and state boards overseeing 529 plans will have to scrutinize investment strategy and philosophy that much more closely.” Jonathan Sard, a certified financial planner and president of Sard Wealth Management Group LLC of Atlanta, which has $80 million in assets under management, agrees.

<b>Jonathan Sard:</b> A settlement will calm investors' fears of risk.
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Jonathan Sard: A settlement will calm investors' fears of risk.

“A settlement will give investors in a 529 plan more confidence knowing that a fund that was understood to be conservative can't take such a high level of risk and not have to pay a price,” he said. College savings plans have seen assets decline 22% from $109.8 billion at the end of the first quarter in 2008 to $85.9 billion March 31, according to FRC. In addition, some 529 plans have been criticized by financial advisers and investors for not offering adequate transparency and protection of investments. Details of the what industry observers said would be an “un-precedented settlement” are being negotiated between New York-based OppenheimerFunds and Illinois, Maine, Nebraska, New Mexico and Texas. It would be critical, especially for program managers.

<b>Joe Hurley:</b> A settlement would put the onus on plan managers to proceed with care.
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Joe Hurley: A settlement would put the onus on plan managers to proceed with care. (Frank Petronio)

“A settlement of this kind would be unprecedented, and I don't think it would be good for program managers,” said Joe Hurley, president and chief executive of Pittsford, N.Y.-based Savingforcollege.com LLC. “It's difficult to assess the impact until we see the details. I think they would probably frame an agreement to lessen the risk of it opening a Pandora's box for other funds.”

Without such a provision, Mr. Hurley said, other state treasurers responsible for 529 programs “will take notice, absolutely.”

The total amount of the settlement and its impact on OppenheimerFunds' bottom line will be critical, industry observers said.

Illinois is seeking to recover $77 million for investors in its Chicago-based Bright Start College Savings Program as a result of losses from the Oppenheimer Core Bond Fund, which was billed as a conservative investment option but lost 36% of its value in 2008.

The amount of money Maine, Nebraska, New Mexico and Texas are seeking to recover has not been disclosed.

“It could be hundreds of millions of dollars,” Ms. Beardon said.

Such a large amount could be damaging to OppenheimerFunds' profit margin for its 529 business, according to industry observers.

Negotiations are at a “critical juncture,” said a spokesman for the office of Illinois Treasurer Alexi Giannoulias in Chicago.

Jason Hayes, chief deputy state treasurer for Nebraska, said he could not comment on details of the negotiations but is “optimistic” about the progress to date.

OppenheimerFunds also ex-pressed confidence that a settlement can be reached.

“We're moving ahead rapidly with discussions, and we look forward to potentially putting the matters relating to the 529 plans we manage behind us,” said Jeaneen Pisarra, spokeswoman for OppenheimerFunds, which is a division of MassMutual Financial Group of Springfield, Mass.

For now, program managers and state administrators view the Oppenheimer fund's meltdown as an isolated incident, and not one that will be damaging to other program managers in the future.

“I think it was an isolated case of a bad decision by a single portfolio manager in an unprecedented collapse of derivative markets,” said Peter Mazareas, vice chairman of the Washington-based College Savings Foundation and chief executive of Nahant, Mass.-based Strategic Advancement Group Inc.

“I think what we'll see as a result is increased stewardship of program managers to oversee portfolio managers to make sure their style is pure, as well as increased responsibility by state investment boards to ask the right questions about investments in their 529 plans.”

While Dan Ebersol, chairman of the Lexington, Ky.-based College Savings Plans Network, applauded the states negotiating with OppenheimerFunds for their “active role” in pursuing a settlement, he downplayed its long-term impact.

“I would not overemphasize the precedent-setting nature of a potential settlement. I think it would be a unique occurrence that came about as a result of a once-in-a-lifetime market event,” said Mr. Ebersol, who is also director of the Georgia Office of Treasury and Fiscal Services.

The negotiations are widely seen in the 529 industry as an indication of OppenheimerFunds' eagerness to put the bad publicity behind it and expand the firm's college savings plans business.

“The discussions are definitely a reflection of our commitment to staying in the business,” Ms. Pisarra said.

Indeed, last week, OppenheimerFunds was believed to be among the finalists selected to interview for the direct-sold U.Fund College Investing Plan, whose contract with Fidelity Investments of Boston ends this year.

While OppenheimerFunds' negotiations with Illinois, Maine, Nebraska, New Mexico and Texas appear to be harmonious, the company's legal battle with Oregon, where the Core Bond Fund's troubles first became public, is anything but.

Oregon filed a lawsuit against OppenheimerFunds in April seeking to recover $36.2 million that the state claims its 529 investors lost as a result of the Core Bond Fund's taking “extreme risks in a search for speculative large returns.”

OppenheimerFunds in May moved the case to U.S. District Court for the District of Oregon and filed a motion to dismiss the suit.

This month, Oregon filed a re-sponse arguing against dismissal and also filed a motion to move the case back to state court in Marion County.

OppenheimerFunds' Ms. Pisarra would not comment on the Oregon lawsuit.

E-mail Charles Paikert at -cpaikert@investmentnews.com.

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