State Treasurer Alexi Giannoulias announces improvements to the Bright Start College Savings Program. From left to right: Advisory board members Jose Santillan and Albert Grace, Jr.; State Treasurer Alexi Giannoulias; Bright Start investors Mike and Colleen Evans.

State Treasurer overhauls 'Bright Start' $2.1 billion college savings program to become one of the most affordable in the nation;
New program manager commits millions
in scholarships to Illinois students

March 12, 2007

State Treasurer Alexi Giannoulias today named a new administrator for the state’s tax-exempt college savings program so Illinois families can earn more money to send their children to college.

The new program manager, Oppenheimer Funds, Inc., will significantly reduce the costs of Bright Start, making it among the lowest-cost programs in the nation, and will offer better investment options to gain a higher rate of return. In addition, Giannoulias negotiated $3.5 million in scholarship money that Oppenheimer will earmark for Illinois students planning to attend college.

Bright Start has come under criticism for its underperforming funds and high structural costs. Savingforcollege.com, an independent authority that analyzes college savings programs, recently ranked Illinois’ Bright Start program 47th out of 48 plans nationwide. Giannoulias is confident this overhaul will turn Bright Start into one of the best college savings plans in the nation.

“Stronger performing funds, increased investment options and lower fees will make Bright Start a vastly improved program for current participants and much more attractive to prospective investors,” Giannoulias said. “With costs of college skyrocketing, Oppenheimer will give Illinois families the biggest bang for their buck.”

Bright Start’s former program manager, Legg Mason, will complete its transfer of accounts to Oppenheimer within the next few months.

Scholarships
As part of its seven-year contract, Oppenheimer will allocate $3.5 million in scholarship money to college-bound students. The Treasurer’s Office is developing a selection process and criteria to award the $500,000 in annual scholarships to Illinois students from low- and middle-income families from every region of the state.

“The $3.5 million devoted to scholarships demonstrates the state’s and Oppenheimer’s commitment to support students who do the right thing, work hard and understand the importance of going to college, but require some extra financial help,” Giannoulias said.

Better Performing Funds
As one of the nation’s largest and most experienced money managers, Oppenheimer will offer Illinois residents an impressive portfolio lineup, which will include popular, strong-performing Oppenheimer and Vanguard funds. All of the underlying funds Oppenheimer will employ in Bright Start are currently ranked in the top quartile by Morningstar, Inc. and Lipper. Both Oppenheimer and Vanguard equity portfolios have outperformed the existing Bright Start portfolio during the past three years.

Along with its actively managed funds, Bright Start will offer a portfolio of index funds for the first time. Index funds seek to match the performance of specific stock and bond market indexes, such as the Standard & Poor's 500 Index. Index funds generally have lower fees than actively managed funds, which rely upon managers to buy stocks in an effort to outperform the market as a whole.

“Our Vanguard Index funds are safe investments that take the guess work out of investing at a much lower cost than actively managed mutual funds,” Giannoulias said.

Investors will have the option of choosing from different investments that provide exposure to three equity options – an S&P 500 index fund, a small-cap index fund, and an international index fund.

Current investors will have their assets transferred from existing mutual funds to similar actively-managed funds managed by Oppenheimer. The asset allocation and the percentage of the investments in stocks, bonds, international investments, etc., will remain the same. The Treasurer’s Office will notify all Bright Start account holders about the changes to the program and will provide information on how to transfer assets to index funds.

Costs and Fees
Giannoulias also announced significant reductions in the costs of Bright Start, which will make it one of the most affordable college savings plans in the nation.

“There is no reason why a college saving program with in $2 billion in assets should have such high fees,” said Giannoulias, referring to the old plan that required participants to pay a .99 percent annual fee.

Under the new plan, costs will vary from .19 percent to .21 for index funds and .53 percent to .64 percent for actively managed funds.

“High expenses can siphon off returns and limit financial gains that ultimately eat away at money that would have gone toward tuition,” said Giannoulias, noting that Morningstar criticized Bright Start’s high fees, saying they took up a “sizable portion” of fixed income returns.

Under the new contract, the typical Bright Start investor will save approximately $5,000 to $10,000 in fees. These figures are based on a family that contributes $3,000 per year for 18 years and earns an industry-average 8 percent return. Investors who choose Vanguard funds will save the most because the fixed index funds have a much lower expense ratio.

The Treasurer’s Office also negotiated break points in the new contract, which call for Oppenheimer to reduce Bright Start’s fees as investor’s assets increase. This will ultimately reduce the overall costs for individual participants.

Tax penalty
In addition to naming a new program manager, Giannoulias is seeking to pass legislation that will eliminate the tax penalty imposed on Illinois residents who invest in out-of-state 529 programs.

Illinois is one of two states that impose a 3 percent state tax on the earnings residents receive from 529 plans administered in other states, and residents must pay income tax on contributions to out-of-state plans.

“We should not punish Illinois residents because they want to get the most for their money,” Giannoulias said. “Illinois’ savings plan should attract investors based on its own merits and because it’s the best in the country, not because investors will get penalized if they go elsewhere.”

Giannoulias’ bill (HB 376), sponsored by State Rep. Jack Franks (D-Woodstock) and State Sen. James Clayborne (D-East St. Louis), to remove the penalties has won unanimous approval in the Illinois House and now awaits a vote in the Illinois Senate.

Nearly every state runs a college savings program, called a 529 plan after the section of the IRS code, which offers tax advantages to investors who use the money to cover the costs of higher education. Earnings on 529 plan investments are exempt from state and federal income taxes.

Bright Start, which was created in 2000, boasts more than $2.1 billion in assets and has more than 142,000 separate accounts.