A Lake County resident has sued Illinois Treasurer Michael Frerichs, accusing him of mishandling the state’s college savings plans and improperly assessing fees on participants.
In a class action complaint filed Feb. 16 in Cook County Circuit Court, Melissa Kay said Frerichs is “illegally administering the $9 billion Illinois College Savings Pool, commonly known as Bright Start and Bright Directions.” Participants buy and manage Bright Start funds, while investment advisers buy and manage Bright Directions portfolios. Kay said the state has overcharged plan participants for nearly a decade.
Illinois’ plans are organized under federal rules for qualified tuition programs, known as 529 plans. Provided funds used for approved educational expenses, investments - which can be established at birth - are exempt from federal taxes on both earnings and capital gains, as well as withdrawals.
The Illinois General Assembly created additional benefits for its College Savings Pool, including a restriction stipulating administrative expenses can be paid only from pool earnings, and any money beyond those expenses is to be returned to participants.
Kay said she has invested in a plan for both of her daughters since 2013. They currently are Bright Directions plans. Her funds have been invested in age-based portfolios, which carry administrative and program management fees. She accused Frerichs of charging both fees against average daily net assets of each portfolio instead of earnings only.
“Neither of these fees appears as a line item charge,” the complaint stated. “Rather, they are deducted directly from each fund’s net asset value and are not evident to the average participant.”
Even if the fee is returned, Kay continued, fund participants stand to lose earnings because their capital is diminished, and they suffer damages if they withdraw account balances during a market dip. Further, she said fees are over-collected since the method “has no connection to the actual administrative expenses incurred.”
Frerichs, according to the complaint, established an administrative trust fund, Trust 668, to hold deposits of state administrative fees. The fund, which has grown to nearly $4 million, has run a surplus since 2005, Kay alleged, rather than return excess amounts each month to fund participants. “In 2016 alone, (Frerichs) failed to repatriate $529,404. Had that money been returned and invested in the S&P 500 for 2017, for example, it would be worth $644,972.89.”
Kay also said Frerichs exempted three different portfolios from the full administrative fee — index age-based, index target and index individual fund — although the efforts those fees pay for “are of communal benefit to all College Savings Pool participants, regardless of the type of investment.” As a result, she said, “participants holding one-third of the investments are paying 100 percent of the state administrative fee.”
The class would include all pool participants, with one subclass for those assessed the full administrative fee and another for those assessed a lower rate.
Formal allegations include breach of fiduciary duty and unjust enrichment. Kay wants the court to hold the amounts in Trust 668 in constructive trust and to order an accounting of administrative fees. She also seeks damages, including earnings that should have been accrued had the fees been assessed in accordance with state law, and a court order forcing Frerichs to take program management and administrative fees as the law requires.
Representing Kay in the matter are attorneys from Heffner Hurst, of Chicago.