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COLLEGE SAVINGS 101

3 safe and secure 529 plan investment options

by Erin Peterson

If you have a child heading to college soon or you can't stomach the ups and downs that come with 529 plan investment portfolios, it may be time to invest in something that's not as volatile as the market. Guaranteed options and stable value offerings can provide substantial security for your savings, but don't expect big returns from these choices.

Here's what you need to know about your options so that you can make an informed decision for your 529 plan.

Guaranteed options

What they are: Guaranteed options are 529 investments that cannot lose money for the investor. In addition to a guaranteed return of principal, these 529 plan options offer a small return that is reset to a new level each year.

Return on investment: Returns are relatively low. For example, Georgia's 529 plan guaranteed options offers a return range of 1 percent to 3 percent, while Minnesota's plan is offering a guaranteed option of 2.65 percent in 2010.

Who benefits: If you've got a child who is in college, you may want to push next year's tuition costs into a guaranteed option to secure a small return that you simply can't lose.

Other notes: A 529 plan guaranteed option tends to offer returns that won't match tuition inflation. Because of the relatively low returns, you'll have to make sure to keep your costs low, says Rob Drury, executive director of the Association of Christian Financial Advisors in San Antonio. "You've got to compare fees for (guaranteed options), because the growth potential may be so low that fees almost eat up any gains," he says.

Stable value investments

What they are: Stable value investments are low-risk 529 plan funds that typically focus on investments in government securities with relatively short maturities of two to four years, says Drury. They may also include "wrapped bonds," or bonds with a layer of insurance to guarantee a certain return.

Return on investment: Over time, stable value investments often have returns in the neighborhood of 5 percent to 6 percent. But for the last few years, the stable value investments have earned just a percent or two.

Who benefits: These funds can be a good place to invest your cash in the year or two before college. "As your child gets into his mid-teen, when you have less time to recover your losses, you can start to lean in this direction (of stable value funds)," says Drury.

Other notes: While stable value investments are considered safe 529 investments, they haven't always earned money for their investors, notes Marina Goodman, a financial analyst with Brinton Eaton Wealth Advisors in Madison, N.J. "In 2009, for example, New Jersey's stable value option actually lost money," she says.

Some 529 offerings that are labeled "stable value plus" function as guaranteed options, with a promise to return principal plus a small guaranteed level of interest.

Keep in mind, because stable value investments tend to snag relatively small returns year after year, they may not keep up with tuition inflation, meaning your money may be worth less than it was when you initially invested it in relation to rising tuition. For that reason, these vehicles are not good places to park all your money for the long term, Drury says.

Other guaranteed programs: 529 prepaid tuition plans, independent 529 plans

What they are: Not typically considered investments, these programs offer to match tuition increases at specified schools dollar for dollar if you prepay for portions in advance. The 529 prepaid tuition plans are for in-state students at state schools, while the independent 529 was created for a nationwide network of private schools.

Return on investment: Though not technically a "return," these programs will guarantee that your money marches in lock step with tuition. If you pay for a semester's worth of school now, you'll guarantee that that money will pay for a semester when junior enrolls.

That's no small feat. Over the past two decades, tuition inflation has averaged just under 6 percent, according to CollegeBoard.org.

Who benefits: Parents who have a good sense of where their child will attend school can leverage these programs to get the most from their money.

For parents with a child who is within a year or two of enrolling, these 529 plans can be particularly appealing. The return on investment can reach 6 percent per year, a good rate if you only have a year or two to invest, says Mary McConnell, director of college savings products for Charles Schwab in San Francisco.

Other notes: Prepaid 529 programs can seem like a perfect solution for parents who want to ensure they can pay for their child's education. Still, they do offer some serious drawbacks, McConnell says.

"It's not an investment where you're going to get any type of upside growth," she says. If the market jumps by 20 percent in a year while college tuition climbs just 5 percent, you'll miss out on the market's gain. "In addition, there may be restrictions about which schools you can attend," she says.

Posted July 2, 2010

Erin Peterson is a freelance writer based in Minneapolis.