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| 2003
News and Press Releases |
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HEADLINE:
Fund Scandal Puts College Saving Plans On Alert
By: John Kimelman
NYTimes.com. November 23, 2003
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EXCERPT: OVER the last few years, investors' biggest complaint about state-sponsored college savings plans was that they often generated weak returns or actually lost money in the bear market. But the recent investigations into reports of improper trading practices at several mutual fund companies have given investors in these tax-sheltered plans a new cause for concern. Several fund companies implicated by regulators - including Putnam Investments, Strong Capital Management and Alliance Capital Management - are nationwide providers of these savings programs through extensive brokerage networks. And several fund portfolios that may have fallen victim to improper trading have been used in a variety of college plans, possibly affecting the returns of many savers, according to officials with several states and mutual fund companies.
Oregon recently fired Strong Capital as one manager of its college savings program after the New York attorney general, Eliot Spitzer, said he would take action against the company's founder and chief executive, Richard S. Strong, over trading of fund shares. Other states are taking a slower approach, investigating trading practices and looking for ways to diversify their offerings by adding fund companies. "I would not plan to terminate a longstanding relationship we have with Alliance Capital in haste,'' said Paul J. Tavares, general treasurer of Rhode Island, who oversees his state's savings plan, CollegeBoundfund. "At the same time, I cannot ignore the seriousness of these allegations." Many investment advisers say investors suffered little in returns, in part because most popular college portfolios include several underlying funds, not all of which were suspected of improper trading. Moreover, fund companies involved in the scandals have agreed to repay investors for any losses that resulted from improper trading. But this comes as little comfort to financial planners, who worry that some investors, stung by this latest incarnation of corporate scandal, will turn away from an otherwise sound way to invest for college. "Saving money for college is difficult enough, given that people also have to save for retirement,'' said Tom Davison, a partner at Summit Financial Strategies, a fee-based financial planning firm in Columbus, Ohio. "This scandal could give investors one more reason to turn off from the whole college savings process, and that's the last thing that families need to do." Over the last two years, state-sponsored college savings programs, known as 529 plans, after a section of the tax code, have been embraced by many Americans as a sensible way to set aside money for college. The investments grow in a tax-sheltered account and withdrawals are not subject to federal taxes as long as the money goes for education. In addition, when investors use plans based in their home state, they may be entitled to state tax advantages that are not available for out-of-state plans. In the year ended Sept. 30, assets in these plans grew to $29.1 billion from $15.8 billion, according to the Financial Research Corporation, a market research firm in Boston. Many fund companies, including Fidelity Investments, the Vanguard Group and Franklin Templeton Investments, have formed partnerships with state governments to offer 529 plans.
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