For good or ill, 529 plans fiddle with investment options pretty frequently. In April, for example, North Carolina’s 529 plan added a federally insured investment option, so investors in that plan can park their money and have no doubt that every dime’s insured and secure. In March, Oregon’s 529 plan completed a transition from Oppenheimer Funds to TIAA-CREF. This change means that investors in the Oregon 529 plan now can choose from a menu of funds from 10 different investment managers versus only two managers offered under Oppenheimer.
After the financial crisis and its impact on the markets, it makes sense to carefully monitor your 529 plan investments. Because investing for college has a shorter timeline than doing so for retirement, you don’t have as much time to build assets and can incur more risk if the market tanks at the wrong time. In addition, rules governing 529 plans allow you to make one only investment option change a year. So if you make a mistake, you have to wait until Jan. 1 of the next calendar year to fix it.
These five tips will help you figure out the best ways to handle a 529 plan’s investment management change, decide whether you should change your options when new choices are offered and monitor your college savings plan investments.
1. Check out the new investment manager. Usually, you’ll have at least a couple of months between when a 529 plan hires a new management company and when that company actually takes over. That’ll give you some time to check out the new management company, assuming that you know about the change.
How to find out? Most 529 plans have newsletters that they include with either paper or electronic quarterly statements. So if you read those, you’ll find out about any investment change.
Another option is to keep up to date by periodically looking at 529 plan news at sites such as SavingforCollege.com under the Plan News section or Morningstar under the News section. Any news update will include details about the new management company and may have information about funds that could be added.
Go to the new investment management firm’s website and look around. Most 529 plans feature large mutual fund companies or asset managers such as TIAA-CREF, Vanguard, Putnam, BlackRock or Fidelity. Their websites will usually list the types of investment options they offer in their 529 plans.
You can also look at the other plans they manage at SavingforCollege.com by searching for 529 plans and filtering by manager.
2. Analyze new investment options versus current ones. As the date of the switch nears, you’ll hear more about what the new investment options are and whether you’ll be able to stay with your old selections. Most 529s will let you stay with your old options, but the new ones may be better and worth checking out.
As 529 plans have grown in popularity, their investment option choices have grown from plain-vanilla mutual funds to a vast menu of choices, including age-based options, individual mutual funds, exchange-traded funds and portfolios of individual funds packaged into a conservative, moderate or aggressive portfolio. Most 529 plans offer actively managed and index funds.
Even if you want to stick with the approach you have now, it makes sense to compare what you’ve got with similar options offered by the new investment management company. For example, if you’re in an age-based plan and want to continue with that approach, you could compare your current age-based plans with the new ones to see which offers the lowest fees and the managers with the best track records.
If you’re currently in a portfolio of individually packaged funds, you can do the same type of comparison by looking at the fees charged by the new and old managers, the track records of the managers who are picking the investments and the types of funds included in the package. Generally, the lower the fee charged, the better, because then you get to keep more of your investment returns.
3. Re-evaluate your savings goals.
A change of investment managers or addition of investment options is a good opportunity to review your overall savings and investing goals and re-examine your time horizon.
Saving for college can be tricky because it’s so expensive and because you also need to save for an even more important goal: retirement. If you’re not sure whether you’re saving enough or how much you should be saving, check out SavingforCollege.com’s World’s Simplest College Cost Calculator.
Don’t faint when you get the result: The calculator assumes that you plan to save enough to cover the full cost of college, which is a pretty high bar. But saving anything’s better than saving nothing, and the calculator can give you some idea of what the actual costs will be.
If you’re not saving much and you want your savings to grow faster, you might choose more aggressive invest ment options when your child’s very young. You could also start out saving a smaller amount, say $100 or $200 a month, and increase that every year. Another option is to save slightly more every month for older children than you do for younger ones because the older children will be going to college sooner.
4. Review your investment options once a year. Because you’re only allowed to change investment options once a year, it makes sense to review them annually. At that time, take a look at how your investment has performed during the past year versus comparable market indexes. Most 529 plans will provide such comparisons in your statements or on their websites.
Although you don’t want to dump a fund or group of funds just because of an off year, more than one year of bad performance versus comparable indexes is a cause for further study.
You should also see whether the investment management firm has increased or decreased fees and by how much. A fee decrease is always welcome; many 529 plans have been decreasing fees as they increase their assets. A fee increase, if it isn’t much, shouldn’t be a cause for alarm unless those increases are taking place regularly. Still, the lower the fee, the better.
5. Consider switching to a safe or guaranteed option when your child is in high school. Finally, whatever your investment option, remember to re-evaluate your choices when your children are about halfway through high school or at least during their junior year to ensure that you’re OK with the risks. College is too expensive to blow your hard-earned savings on a market meltdown that occurs right before your son or daughter leaves for college.
Most plans offer a money market fund, stable value fund or federally guaranteed savings account options. Choose that, or go with a age-based plan that’ll automatically move your savings into a safer option when your child turns 17. Most students reach this age sometime in their junior year or at the end of their sophomore year.
When they enter high school, you’ll want to make the first move to a more conservative approach. At that point, you’ll have only four years until college, and it’s not a good idea to risk too much on aggressive investments. If you’re in an aggressive portfolio, you should consider switching to the moderate or conservative portfolio.
If you’re invested in individual funds, think about moving your investments into a balanced fund that has a mix of stocks and bonds or into two funds, one with conservative value orientation — perhaps with an emphasis on dividend-paying companies — and a bond fund. Then, once your child is a junior, it makes sense to move all or most of your investments into a money market or savings account so that there’s no risk of principal loss.
If the market goes up, you may lose some returns. But the opportunity cost might well be worth the peace of mind you’ll gain by knowing exactly how much money you can count on to pay those tuition bills that’ll be coming your way before too long.Websites of Interest
SavingforCollege.com’s 529 news World’s Simplest College Cost Calculator Morningstar.com