MassMutual Settles College Savings Probe for $77.2M

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December 28, 2009 Monday 04:38 PM EST

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MassMutual's Asset Management Unit Settles College Savings Probe for $77.2 Million

Fran Lysiak

CHICAGO

OppenheimerFunds Inc. has resolved an investigation by Illinois alleging the company mismanaged an underlying fund in the state's 529 college savings plan program, known as Bright Start, the state attorney general and treasurer said.

Under a settlement, Oppenheimer, a unit of Massachusetts Mutual Life Insurance Co., agreed to pay Illinois $77.2 million, which will be paid to the college savings plan account holders to recoup investment losses.

Attorney General Lisa Madigan, in a statement, said she started the probe after Treasurer Alexi Giannoulias warned the Bright Start portfolios exposed to Oppenheimer's Core Plus Fixed Income Strategy, one of Bright Start's underlying funds, had suffered "extraordinarily high losses" compared with the bond index used as its benchmark.

Oppenheimer marketed Core Plus as a conservative investment appropriate for beneficiaries who were at or near college age, the state alleged. This fund, however, contained risky investments and ultimately experienced excessive losses. The management team affiliated with Core Plus is no longer with Oppenheimer, the state said.

Illinois, the first state to execute a final settlement agreement with Oppenheimer, said it worked with other states, including New Mexico, Texas, Maine and Nebraska.

The college savings plan participants covered by the settlement had portfolios exposed to Core Plus from Jan. 1, 2008, through Jan. 25, 2009. "As a result of this agreement, Illinois families invested in this fund will be able to recover substantial losses in their college savings accounts in a timely manner while avoiding the uncertainty and delay that would accompany lengthy and expensive litigation," Madigan said in a statement.

In a statement, OppenheimerFunds said Illinois acknowledged that it didn't admit any wrongdoing. The investigation started after the severe market volatility impacted all investments in 2008, it said. "The company maintains that it acted lawfully and in good faith in managing the investments in the Bright Start program," OppenheimerFunds said.

Bruce Dunbar, a spokesman for OppenheimerFunds, said the investigations centered on its role as manager, administrator and marketer of the 529 college savings programs as it's under contract with the various states to administer them. The company remains in talks with officials in Texas, Maine and Nebraska, he said.

The investigations began in 2008 and early 2009, "which was a challenging period for all investments" but states were particularly interested in how plans performed during that period and "how we executed our responsibilities during that time frame," Dunbar said.

OFI Private Investments, a unit of OppenheimerFunds, remains the program manager for the Bright Start program, the company said. The funds that replaced Core Plus have experienced year-to-date returns of 8% to 9%, according to the state.

Separately, OppenheimerFunds earlier this month said it reached "an agreement in principle" to resolve New Mexico's investigation into how it managed the state's two 529 college savings programs.

Under the proposed settlement, Oppenheimer agreed to pay New Mexico $67.3 million, which the state will distribute to plan participants.

Massachusetts Mutual Life Insurance Co. currently has a Best's Financial Strength Rating of A++ (Superior).

(By Fran Matso Lysiak, senior associate editor, BestWeek: [email protected])

December 29, 2009

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