Lower Returns for Higher Ed

AIR DATE: Monday, January 26th 2009
POSTED BY: SARAH JANE ROTHENFLUCH
Photo credit: Brooklyn Tyger / Flickr / Creative Commons

No matter which way you look at it, a college education — whether at a public or private institution — is expensive. Many parents start saving for their kid’s schooling before the child blows out his first birthday candle. What happens when the conservative investment they have relied on ends up losing money?

That's what happened to Oregon's 529 College Savings Plan. Many of the funds in it were billed as safe, conservative investments, but one of the most conservative lost 38 percent of its value in 2008. (Check out this site and download Opp529 Quarterly Performance for specifics).This dropped Oregon's 529 plan from eighth best out of 47 states in 2007 — to 43rd a year later.

Now the state attorney general, John Kroger, is investigating the fund. And, today, the House education committee is holding an informational meeting on the Fund.

Following recommendations from state treasurer, Ben Westlund, the College Savings Board JUST decided to withdraw all plan assets from two specific Funds, restructure the program, and increase oversight and increase options for Oregon's families. He's exploring the options of prepaid tuition (possibly like Washington's GET program) and an age-based portfolio.

What are you doing to save for your child's education? Are you one of the 70,000 people saving for college in Oregon's 529 College Savings Plan? If so, I dare ask, how much have you lost? Who do you think should be held responsible for the losses? How will those impact your child's future?

GUESTS:

Tagged as: business · college · parenting · university of oregon

Photo credit: Brooklyn Tyger / Flickr / Creative Commons

"Who should be held responible for the losses?" In the news we are learning all too well where the money has gone. I will not go into specifics, but crime and criminal management of our national funds have had great effect upon our college savings. I feel sorry for the parents of children coming of college age now. I am planning on going to AAU in the sommer. The start of those classes is $2200 per class. I have no savings to rely on. But I am not letting that stop me. I will be in debt up to my ears when all is said and done. But I think this is worth it to me to better myself.
Chrissy4605 —
67% of high school graduates go on to college.  35% graduate with an average of $20,000.00 in student loans which can never, ever be discharged.  the remaining 32% have no degree, just student loans to pay for 15 to 20 years.  and those who get the degree move to seattle, then atlanta, then somewhere else, incurring major expenses and uprooting the family with each move.  then you get downsized and your wife leaves you, your family is disjointed and all you have are your student loans, but you will do as you are told, because, hey, they own you.   bsba southern oregon, aa computer user support lane community.  for what its worth, followed my own advice. bought a house in eugene, stayed there, retired at 55 without being an indentured servant to my employer.  regards
concerning —
I put zero into any college saving plan for my kids. It's a waste even if you the account increased in value. Any college/university will see this as savings when applying for scholarships. These savings will then be subtracted from any scholarship your child gets. It's better to put savings into the parents retirement accounts (401Ks, IRAs, etc) that are not seen as saving in terms of applying for scholarships. Also spend the money up front on the best education your child can receive when they are in preschool and grade school. You'll get a lot more bang for your buck.
ddebrito —

I have to respectfully disagree with the statement given by Mr. Wolfgruber at Oppenheimerfunds that the losses are attributable to a bad market.  The two most conservative portfolios for the Oregon Plan were heavily invested (more than one quarter of all the assets) in Oppenheimer’s  Core Bond Fund, which was not managed as a conservative fund.  Yes, market conditions in the last 6 months have been extremely unfavorable to investors.  But, portfolio managers are professionals paid to manage risk.  Conservative portfolios should never incur the losses like those suffered by the Oregon College Savings Plan.  There was no excuse for taking the risks that were taken.  They gambled and we lost.   I posted some information on the subject on our website  www.bankslawoffice.com. 

bobbanks —
So, what now? My daughter's account lost about 25% in the last year. She's a sophomore now and the chances of making up this loss are nil, but what is the state going to do with the money that was manged by Oppenheimer? Do we parents need to actively manage this money or will it go somewhere safer? One of the features of a 529 program is that it is supposedly being managed by professionals and parents don't have to worry about it themselves. Is this now a naive belief?
jrw —

Your guests said that in 2004 you determined the OPIGX (Oppenheimer Core Fund) to be a prudent and wise fund for a conservative investment. He also stated that nobody could foresee the downturn in high-risk mortgage based securities which the fund was so immersed in. GIVE ME A BREAK. As a former Lehman employee and as an market forecaster of only 6 years I can tell you that it was more than obvious what was eventually going to happen. The only thing initial holders of these securities were concerned with was making them look profitable, guaranteed, and selling them to the poor schmucks who were gullible enough to buy bad debt. Putting lipstick on a pig won't change the fact that it's still a pig. This is yet another example of how deep these quick profit, mortgage backed securities are penetrating even what is suppose to be the "safest" of investments.

ReasonablySkeptical —

I have an automatic withdrawl from my checking account to Oppenheimer every month. DO they recomend that I continue doing this? I have a Freshman in college, and a Senior in High school. Nancy in Stayton

nancy —
interesting that back several years, the State had problem with Strong and had to get us out of that account....seems like a pattern to me, that people aren't talking about. 

I had an advisor who told me to put a bunch of money in the Strong account, and I wouldn't....and I'm glad I didn't.

haveahrt —
Maybe we should be looking at strategies to reduce tuition fees as opposed to "investing" in financial markets and borrowing from private lender high interest student loans.  This is no way to run a railroad.
pembquist —
Questions:
How were they determing the risk level of the Fund? Was it like like buying lottery tickets and having a winning streak, thus making them a low risk?

It reminds me of PERS, which did not, and I think still does not in its current reincarnation, offer a non stock market option.
steve reinemer —
Couldn't see it coming?

Back in 1999 when Conservative Republicans pushed through their law preventing any regulating of the new derivative financial scams, many other people and I warned of upcoming disasters.

I didn't know how bad the effects of Conservative Republican anti-Regulation policies  would be but we do know now, they have financially raped our nations children for generations into the future, and slammed the brakes on the entire World Economy, putting us all into a Recession-Depression.

Yeah, we saw it coming but Conservatism has turned out to be a worse nightmare than we could even imagine.
Tom D Ford —
Steve Duin is truly out of his element here, is apologetic lead in to this was a sham for his ignorance and his meddling into something that he knows nothing about. The underlying financials in this were hidden within those who sold the credit default swaps, everyone from the parents, to the treasurer, Oppenheimer etc., did their due diligence, but the risks were lied about in such a way that NOBODY saw them. Those who packaged and sold the CDS were the true villains in this, and the OCSP was caught into it. The perfect storm of financial conditions that happened this past year brought all this to light and exacerbated the problem. But at this point to try and blame the treasurer and the OCSP is ludicrous and exposes Duin for the poor thinker he really is!
Chad —
To say NOBODY knew this was coming is a stretch.  There have been shows on OPB with experts who long ago questioned these synthetic assets that can't be explained in plain English.  I thought Duin's point was it's the OCSP's and treasurer's job to select funds suitable for us average folk. Going forward the issue is how to minimize the chance this happens again. The problem is selecting fund managers is a choreographed dance well-known to insiders but opaque to the public.  Scorecards can be deftly massaged to make a pre-chosen manager the winner with no apparent signs of impropriety. I'd like to have heard more about that $300K of marketing funds Oppenheimer provided - sounds like the proverbial campaign slush fund - which in the end just lowers their fund returns.  I'd say Duin is on to something and AG Kroger too. 
FollowTheMoney —
We have 2 kids in college and are unfortunately invested in this losing fund.
We've been paying their college expenses using our own $, hoping that this fund would recover its value.  Meantime, they'll soon be out of college and I'm wondering whether I'm now going to incur yet another penalty because the money was not spent directly on their college expenses.
Do you say anything about this?

BB —

I'm wondering how much of our drop in fund values can actually be attributed to the problem fund, since the Oregon funds only had a percentage, 10% to 35%, mixed into any given fund?? And within the problem fund, how much was really "toxic"??

steve reinemer —
Saving and investing are not the same thing. How easy it is to forget.
squarehead —

second

ReasonablySkeptical —
Let me first say, I have no children--in college or otherwise.  I want to know what the dollar amount of the state and federal tax decuction was and what did the parents do with that benefit.

Thanks
jackvonfeld —
People want a quick fix and a guarantee.  The 529 is just the same as any group of mutual finds with relative risks.  Investors need to do the same risk analysis vs. return as with any other investment.  For me, I moved everything to the Vanguard funds.  The only mistake was the letter last October that said not to worry...
bbob —

Can I invest in Washington’s pre-paid tuition or is it only for Washington residents?

bowerman61028 —
I empathize with those who have called in expressing that they've lost money in their 529s, but I haven't heard anyone refer to the most annoying sentences in a prospectus: "You may lose money investing in this instrument. Past performance is no guarantee of future performance."
trurl9 —

Also what about full scholarships?  If a parent used pre-paid tuition and then their child doesn’t have to pay for school how would you get the money back?  Or is there less chance the child would qualify because their tuition is pre-paid?

bowerman61028 —
Vanguard Total Bond Market was <up> 5% in 2008.

And its expenses are lower than <any> other Oppenheimer
Bond fund.

That says it all.

State officials should have directed parents toward Vanguard.
Anyone with minimal financial literacy knows this.
pdxlover —

Non-agency Mortgage backed securities (NAMBS) never made much sense for investors before the meltdown because the yields on these pre-meltdown were only a pittance more than truly safe government backed securities such as
Treasury notes.   If these bonds were hard to value and opaque and too toxic for many banks to keep aquiring by December 2007, were they appropriate as safe investments for mom and pop investors afterwards? 

BrianWLeonard —

I'm very interested in this story, but find the coverage of it and answers given thus far very frustrating.

First of all, any fund selected to be conservative (i.e. for near-term horizon) should NEVER be losing 10% in a year, let alone 30% -- regardless of what the stock market is doing.  I would expect such a fund to invest primarily in government securities, and higher grade corporate bonds and perhaps even mortgage securities.  Its pretty clear CBF was investing heavily in credit swaps, distressed financial-sector bonds ("the price is too good to pass up!")  and other junk.

I found Randall Edwards trying to vaguely link the fund's performance (as well as one caller) to the performance of the stock market to be insulting.  This is a bond fund -- NOT THE STOCK MARKET.  It is supposed to be a low-risk, low-yield investment, plain and simple.  Notice what the average performance of similar bond funds are -- nothing close to -30%.  Thus far I have put most of the blame on the idiots at Oppenheimer, but frankly Edwards seems to be somewhat in CYA mode rather than shooting straight about what went down.  Not too surprising, but disappointing nonetheless.

In particular, I never heard any specifics about what oversight the State does, other than looking at fund performance vs. benchmark, which takes about one minute to do.  When they didn't hit their benchmark, do they look at where they are investing and start asking questions?  When I have bought mutual funds, I have received a prospectus which shows how the money is allocated.  Does the state get this information?  Did they look at it, at least after Q3 when the fund was clearly underperforming?  I would hope so, but the lack of specifics offered by Edwards despite several opportunities during your show make me think otherwise.  I was also disappointed the host (or Steve Duin) did not ask these kind of questions.  (I would have tried, but I listened to the show later.)

All that said, while the State perhaps did not do all it could do, its clear to me Oppenheimer is the #1 culprit here.  This is simply gross mismanagement of a fund -- regardless of what the prospectus says or the legalities are.  Most of my frustration is with the lack of information we have about how this fund was managed, and the statements from Oppenheimer to the effect that the losses were consistent with the stated risk level of the fund.  That is BULL.  I would like to see the media hold their feet to the fire, but thus far they seem to be getting away with it.  And if their lawyers wrote their prospectus loosely enough, they will probably get away with it in the courts as well.

pdxdevo —

Comments are now closed.



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