Avoiding Oppenheimer College Fund Disasters in the Future

Today in Bloomberg News, iMoney author and regular Bloomberg columnist John F. Wasik discussed the recent nationwide epidemic of 529 savings plan collapses, taking a detailed look into the trading practices of investment firms like OppenheimerFunds and what led to their downfalls.

For some reason, Oppenheimer’s Core Bond and Champion Income funds had been investing in obscenely risky mortgage security derivatives. The Champion Income fund lost 79 percent last year and the Core Bond fund dropped 36 percent, compared with a loss of about 8 percent for their peers, according to Bloomberg data. Bond funds aren’t supposed to lose this kind of money.

How did these funds slip into college savings plans? State treasurers and independent ratings companies were blindsided.

[...] Greg Brown, an analyst at research firm Morningstar Inc. in Chicago, said the fund’s risk profile “changed rather quickly and due to the delay in regulatory filings, it was difficult to stay on top of the fund — especially when Oppenheimer did not adequately disclose the risks and leverage they were using.”

In addition to explaining what in particular helped contribute to the collapse of 529 savings plans, Wasik offers advice on how to avoid letting the same thing happen to you — most importantly, by taking investing into your own hands and taking control of your funds and how they are managed.

You can reduce asset-management fees by buying directly sold programs and avoiding brokers entirely. If you have a child who may go to college within the next five years, reduce market risk by ensuring age-based options have no stocks allocated.

Wasik also puts the government on notice, for failing to regulate or set broker fee limits on 529 plans. All in all, a very interesting and insightful read. Check out the article in its entirety here.

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