States that operate Section 529 college savings plans are showing an increased interest in hiring third-party investment consultants to monitor their programs in the wake of the stock market downturn and the poor performance of OppenheimerFunds Inc.'s Core Bond Fund.
“We've seen more requests for proposals [from 529 plans] in the past six months than we've seen in the past three to five years,” said Marshall Martin, principal of New York-based Mercer LLC's investment-consulting unit.
The intensified interest by state 529 officials in investment consultants is evident, according to Andrea Feirstein, who is on the executive board of the Lexington, Ky.-based College Savings Plans Network.
“There's definitely more interest in outside consultants now,” she said. “States have recognized that due diligence is an important part of their fiduciary duty and that they need professionals who truly understand technical concepts and performance issues.”
Ms. Feirstein is managing member of New York-based AKF Consulting LLC. The firm advises clients on 529 matters but isn't an investment consultant.
Less than half of state 529 plans have outside investment consultants, according to industry estimates. However, there are signs that this is starting to change.
In April, the Salem-based Oregon 529 College Savings Network hired R.V. Kuhns & Associates Inc. of Portland, Ore., as its investment consultant.
“Although it has been standard practice to use the program manager to provide guidance [for 529 investments], we think it's important to have a higher standard for participants of 529 plans, and we're adding an extra layer of oversight to insure the safety of their investments,” said Ben Westlund, Oregon's state treasurer.
The move followed the state's clash with New York-based OppenheimerFunds over the Core Bond Fund. That fund, an investment option in Oregon's OppenheimerFunds 529 plan, lost 36% of its value last year.
Oregon is suing OppenheimerFunds to recover $36.2 million the state claims 529 investors lost as a result of the Core Bond Fund's “taking extreme risks in a search for speculative large returns,” according to the suit.
More states are expected to retain investment consultants this year.
“Every state may not need to hire an outside consultant, but states that don't have one will certainly think about it,” said Randy Hardock, managing partner of Davis & Harman LLP, a Washington-based law firm with a 529 practice.
Bridget Bearden, an industry analyst with Financial Research Corp. in Boston, thinks that the problems that the industry has encountered be-cause of market losses and the Core Bond Fund leave states with no choice.
“If they don't have an outside consultant, they should get one,” she said.
Virginia has renewed its contract with Mercer for five more years, said Mary Morris, Richmond-based executive director of the Virginia College Savings Plan. The consultant works with the plan's investment advisory committee to provide guidance for investments in the state's direct-sold Educational Savings Trust plan, she said.
“It's a dynamic relationship,” Ms. Morris said. “They help us to structure the plan and establish investment objectives, as well as look at issues like risk tolerance, liquidity needs, asset allocation and performance standards.”
In the coming months, Mercer and the advisory committee will discuss a work plan focusing on asset liability modeling and asset allocation, Ms. Morris said.
Investment consultants not only should monitor a fund's performance but also pick up month-to-month and quarter-to-quarter trends in the market, said Ms. Feirstein, who oversaw a panel on investment oversight of 529 plans at the CSPN conference.
Consultants also should be looking for “qualitative factors” such as the stability of a fund management team in addition to quantitative factors such as a fund's performance measured against industry benchmarks, she said.
“It's not just enough to have an investment consultant. The consultant has to play an active role,” Ms. Feirstein said.
E-mail Charles Paikert at [email protected].
