529 PLANS

Savingforcollege.com

5 ways to judge your 529 plan's performance
http://www.savingforcollege.com/articles/5-ways-to-judge-your-529-plans-performance

Updated: 2014-12-02

by Joseph Hurley

You expect excellent investment results from your 529 plan, but how do you really know? Assessing the performance of a 529 plan can be difficult, and is made especially challenging by the plethora of investment options in the 80+ programs and the frequent changes made by plan administrators.

To help you, we have come up with five different approaches you can use to judge your 529 plan's investment performance:

1. Compare your 529 to your retirement account.

Granted, you probably have different investment objectives when you are talking college versus retirement, but since the money is all yours in either case, comparing the performance of your 529 account to the performance of your IRA or 401(k) can be a useful exercise.

There are two ways to go about this: (1) compare the growth of your accounts over the same time period, adjusting for contributions going in and distributions coming out, or (2) compare the investment performance figures published by the administrators of your 529 plan and your IRA/401(k).

Be sure that the performance figures are shown net of all account management and administrative fees.

You may be surprised to find that your 529 account is outperforming your retirement account, in which case you may wish to consider making changes to your retirement investments.

2. Compare your 529 to similar investment options in other 529 plans.

Depending on which particular 529 plan you are using, you may find one or more other 529 plans using the same fund manager, and in most of those cases, a similar menu of investment options.

For example, a large number of 529 plans use Vanguard funds as underlying investments. If your current 529 account is invested in Vanguard funds, you can easily locate other 529 plans using Vanguard funds and compare their performance. The difference in performance is often due to differences in plan fees, which is important information for you to know.

Alternatively, you can compare the performance of your current 529 plan to other 529 plans that might use different investment managers but employ similar strategies and asset allocations.

For example, if you are currently using your 529 plan's "age-based" investment option, and your child is 10 years old, examine the performance of the age-based option in other 529 plans for beneficiaries who are 10 years old. The results of your analysis will reflect not only differences in performance of the underlying funds along with fee levels, but also the plan manager's success in blending equities, fixed income, and money market investments for a 10-year old beneficiary.

3. Review your 529 plan's benchmarking results.

The states will judge their own 529 investment performance by comparing each of their investment options to a hypothetical "benchmark" portfolio. The analysis will tell the state whether its 529 plan is beating its benchmarks—or lagging behind—and by how much.

Some 529 plans will publish the benchmark performance along with actual performance on the plan's website, making the comparison available for everyone to see. Many states don't make it that easy. They may publish the benchmarking data in their "annual reports", or perhaps only in the minutes of their quarterly board meetings.

If the benchmarking analysis for your 529 plan is not available on the plan's website, you should call the toll-free number and ask for it. If you are told the data is not available at all, you could send a complaint to your state treasurer. After all, it's your money.

Realize, however, that the benchmarks used by one 529 plan are not going to be the same benchmarks used by a different 529 plan. This means that a head-to-head comparison of the plans' investment performance using the same benchmarks is usually not possible.

4. Open a Coverdell or UGMA/UTMA account.

Do you think you could outperform your 529 plan if you were allowed to select all your own stocks, bonds, mutual funds, and exchange-traded funds? Well, go ahead and try.

Take a modest amount of money and open a Coverdell education savings account or a Uniform Transfers to Minors Act (UTMA) account through a discount broker. (The UTMA will be nearly as tax-efficient as a 529 plan or Coverdell account as long as you keep it below the kiddie-tax radar.)

Then simply do your own investment management. Over time you can compare results and determine if your self-managed college-savings account is performing better or worse than your 529 plan. Good luck, because you will probably need it.

5. View Savingforcollege.com's 529 performance rankings.

For several years now, Savingforcollege.com has been producing 529 Plan Performance Rankings on a quarterly basis. We do this by comparing and ranking the published investment performance (1-year, 3-year, 5-year, and 10-year) of a selected number of investment options from each 529 savings plan. The investment options are chosen based primarily on their asset-allocation targets, with the goal of providing an apples-to-apples comparison of 529 plans.

Our ranking algorithm is fairly complex but the results are easy to understand. We rank the direct-sold 529 plans separately from the advisor-sold 529 plans. For the most recent direct-sold rankings, click here. The rankings of advisor-sold 529 plans are available through our premium subscription and include all the performance details that go into producing the rankings.

You expect excellent investment results from your 529 plan, but how do you really know? Assessing the performance of a 529 plan can be difficult, and is made especially challenging by the plethora of investment options in the 80+ programs and the frequent changes made by plan administrators.

To help you, we have come up with five different approaches you can use to judge your 529 plan's investment performance:

1. Compare your 529 to your retirement account.

Granted, you probably have different investment objectives when you are talking college versus retirement, but since the money is all yours in either case, comparing the performance of your 529 account to the performance of your IRA or 401(k) can be a useful exercise.

There are two ways to go about this: (1) compare the growth of your accounts over the same time period, adjusting for contributions going in and distributions coming out, or (2) compare the investment performance figures published by the administrators of your 529 plan and your IRA/401(k).

Be sure that the performance figures are shown net of all account management and administrative fees.

You may be surprised to find that your 529 account is outperforming your retirement account, in which case you may wish to consider making changes to your retirement investments.

2. Compare your 529 to similar investment options in other 529 plans.

Depending on which particular 529 plan you are using, you may find one or more other 529 plans using the same fund manager, and in most of those cases, a similar menu of investment options.

For example, a large number of 529 plans use Vanguard funds as underlying investments. If your current 529 account is invested in Vanguard funds, you can easily locate other 529 plans using Vanguard funds and compare their performance. The difference in performance is often due to differences in plan fees, which is important information for you to know.

Alternatively, you can compare the performance of your current 529 plan to other 529 plans that might use different investment managers but employ similar strategies and asset allocations.

For example, if you are currently using your 529 plan's "age-based" investment option, and your child is 10 years old, examine the performance of the age-based option in other 529 plans for beneficiaries who are 10 years old. The results of your analysis will reflect not only differences in performance of the underlying funds along with fee levels, but also the plan manager's success in blending equities, fixed income, and money market investments for a 10-year old beneficiary.

3. Review your 529 plan's benchmarking results.

The states will judge their own 529 investment performance by comparing each of their investment options to a hypothetical "benchmark" portfolio. The analysis will tell the state whether its 529 plan is beating its benchmarks—or lagging behind—and by how much.

Some 529 plans will publish the benchmark performance along with actual performance on the plan's website, making the comparison available for everyone to see. Many states don't make it that easy. They may publish the benchmarking data in their "annual reports", or perhaps only in the minutes of their quarterly board meetings.

If the benchmarking analysis for your 529 plan is not available on the plan's website, you should call the toll-free number and ask for it. If you are told the data is not available at all, you could send a complaint to your state treasurer. After all, it's your money.

Realize, however, that the benchmarks used by one 529 plan are not going to be the same benchmarks used by a different 529 plan. This means that a head-to-head comparison of the plans' investment performance using the same benchmarks is usually not possible.

4. Open a Coverdell or UGMA/UTMA account.

Do you think you could outperform your 529 plan if you were allowed to select all your own stocks, bonds, mutual funds, and exchange-traded funds? Well, go ahead and try.

Take a modest amount of money and open a Coverdell education savings account or a Uniform Transfers to Minors Act (UTMA) account through a discount broker. (The UTMA will be nearly as tax-efficient as a 529 plan or Coverdell account as long as you keep it below the kiddie-tax radar.)

Then simply do your own investment management. Over time you can compare results and determine if your self-managed college-savings account is performing better or worse than your 529 plan. Good luck, because you will probably need it.

5. View Savingforcollege.com's 529 performance rankings.

For several years now, Savingforcollege.com has been producing 529 Plan Performance Rankings on a quarterly basis. We do this by comparing and ranking the published investment performance (1-year, 3-year, 5-year, and 10-year) of a selected number of investment options from each 529 savings plan. The investment options are chosen based primarily on their asset-allocation targets, with the goal of providing an apples-to-apples comparison of 529 plans.

Our ranking algorithm is fairly complex but the results are easy to understand. We rank the direct-sold 529 plans separately from the advisor-sold 529 plans. For the most recent direct-sold rankings, click here. The rankings of advisor-sold 529 plans are available through our premium subscription and include all the performance details that go into producing the rankings.

 

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