Some Mainers who invested in NextGen college savings plans will receive restitution payments after state regulators determined that Merrill Lynch steered them into inappropriate plans.
According to a consent order, Merrill Lynch failed to supervise its agents who were advising investors opening 529 college savings plans, known as the NextGen Client Select Series. The state said that many investors were put into Class C shares, which are best for those investing for a short period. Over time, Merrill Lynch gets higher fees from those investments than the Class A accounts intended for longer-term investors.
The NextGen fund totaled nearly $9.5 billion in fiscal year 2017, for which Merrill Lynch was paid nearly $40 million in fees to manage.
Bill Norbert, a spokesman for the Finance Authority of Maine, said Merrill Lynch detected the inappropriate investments and reported them to the Financial Industry Regulatory Authority, a nonprofit financial industry oversight organization. FAME administers the NextGen program in Maine.
Judith Shaw, the administrator of the Maine Office of Securities, which issued the order, said that until 2006 only one class of shares – the one geared toward long-term investments – was available to those with NextGen college savings accounts. After the second class was added, she said, Merrill Lynch didn’t have systems in place to compare the age of the beneficiary with the investment class. That meant company supervisors weren’t alerted if a savings plan was opened for a young child but put in a higher-fee plan geared toward those with a shorter investment horizon. That option charged fees over a period of time that ended up being more expensive than those that charged fees upfront.
“We think it was really a failure of Merrill Lynch’s overall supervisory system,” Shaw said, a failure that has now been fixed. “Money set aside for educational expenses should be used to pay for education, not unnecessary fees.”
Shaw also said the problems seemed to occur with those who saw a Merrill Lynch adviser and signed up for college savings plans in person. Those who set up accounts online were automatically directed to the long-term class of investments that charges fees upfront, but results in lower fees over time.
Merrill Lynch is making restitution of nearly $19 million to about 50,000 accounts in the U.S. under the order. In Maine, Norbert said, 673 NextGen accounts were affected and are receiving an average credit of $164. Merrill Lynch is also paying $500,000 to the Maine Securities Investor Education and Training Fund in lieu of paying a civil penalty.
Shaw said that program provides financial literacy training to teachers, as well as investor awareness programs, particularly those geared toward the elderly. The program also produces publications on safe investing.
In a statement, Merrill Lynch stressed that it uncovered and reported that investors were being steered into inappropriate accounts.
“Merrill Lynch self-identified this matter,” the investment company said. “We have worked closely with the state to provide refunds to affected clients.”
Shaw said NextGen grants administered by the Harold Alfond College Challenge program were not affected by the order. Under that program, all Maine newborns receive $500 put into a NextGen savings plan opened on their behalf.
Edward D. Murphy can be contacted at 791-6465 or at: