How Safe Is Your College Savings Account?

Some families could be hit hard by the 529 savings plans losses in Oregon, Pennsylvania, and Alabama

May 29, 2009 RSS Feed Print

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The federal government has already made some small, temporary improvements, allowing investors to change their portfolios twice this year, instead of the standard once, and adding computers to the list of permissible college-related expenses 529 money can be spent on tax-free. And many state officials are launching reforms to strengthen the safety of their college savings programs.

Oregon's attorney general has sued OppenheimerFunds, alleging the firm misled state overseers about the safety of its portfolio. The AG is asking Oppenheimer to make up for the losses. The state treasurer has also hired a new overseer to check out 529 investments and is preparing to hire a new firm to replace Oppenheimer. Oppenheimer says that it told state officials about the derivatives and that no one could have predicted the collapse of the market.

The director of Alabama's college savings program says the state is about to re-evaluate the fund's investment mix and has stopped accepting new investors. She declined to comment on the lawsuit filed by McLeroy.

Andrea Feirstein, a consultant to 529 plans, says that many other states are boosting the safety of their investments. At least six states, for example, now offer FDIC-insured savings options. Two, Utah and Wisconsin, launched new guaranteed opportunities in the last year.

But, Feirstein added, the losses of the last year should also spur investors to take actions of their own, by, for example, researching the asset allocation of age-based 529 portfolios. "Buyers have to do their homework. Those are the lessons we've learned," she says.