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New study: 529 asset allocations vary widely
A recent study conducted by Savingforcollege.com reveals significant variations in the asset-allocation approach underlying age-based portfolio options.
Some 529 plans, our study shows, invest very conservatively for beneficiaries in college or close to college, while others maintain a significant investment in stocks and longer-term bonds even for beneficiaries of college age.
The basic concept behind an age-based investment -- offered by most 529 college savings plans -- is to shift away from stock-weighted portfolios to income-weighted portfolios as your child approaches college age.
That way, the amount you've worked so hard to save is less vulnerable to potentially large losses due to market volatility when the time to take withdrawals gets closer. The intent of this conservative approach is to protect parents with older children, while allowing parents of younger children to capture greater returns over time by maintaining a higher concentration in stocks.
But our study of 529 plans conducted in November 2009, found wide disparities in how the various plans allocated those funds.
Under current market conditions those accounts with significant exposure to stocks, and in many cases those with significant exposure to bonds, could be adversely affected by market volatility.
That's not to say, however, that age-based options with less exposure in the stock market are always preferable. Since most 529 accounts will be withdrawn over a period of four or more years, market conditions may turn much more favorable for stocks before the account for a college student is withdrawn completely.
In any event, investors in 529 plans should be aware of the investment approach used by their investment managers and make sure they are comfortable with the levels of risk in their age-based portfolios.
For the results of our study, including a recap of direct-sold 529 plans, click here. Results for adviser-sold 529 plans are found here.
Joe Hurley is a certified public accountant, founder of SavingForCollege.com and a vice president of Bankrate, Inc.
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