5 tips to deal with a change in 529 plan advisers

http://www.savingforcollege.com/articles/20100827-5-tips-to-deal-with-a-change-in-529-plan-advisers

When you sign up for a 529 plan, one of the most important issues is selecting the best investments for your child. But if your state changes investment advisers, which many have, you may want to re-allocate your invested funds because your college savings plan will automatically place them into similar, but not identical, funds.

Since the beginning of 2010, three states -- Nebraska, Ohio and Montana -- have made plans to change the investment adviser for their plans. A 529 plan investment adviser manages the investments that are offered through the college savings plan, which are usually mutual funds.

When a new 529 plan investment adviser takes over, the investment funds in which you are currently invested are replaced with other, similar investment funds, says Joe Hurley, founder of Savingforcollege.com.

It is all done automatically for you when the new investment adviser takes over," he says. "The new investment adviser comes up with a menu of investment options so that every option under the old plan has an equivalent option under the new plan."

Generally, state treasurers who run 529 plans don't make decisions to change investment managers lightly. They may be displeased with the performance of the investment funds in the college savings plan or are looking for lower fees, Hurley says.

You're given similar investments

While the 529 plan does its best to put you in options that are as similar as possible to your old options, they aren't exactly the same. So, it makes sense to review what your new investments are, compare them to your old investments and decide if they still fit, says Kevin Worthley, a Certified Financial Planner with Retirement Planning Co. of New England in Providence, R.I.

Any change in your investments that results from a change in investment advisers doesn't count towards the one investment change the IRS allows you to make per year, says Hurley. So, if you don't like your new investments, you're free to make a change without a penalty from the IRS. But be careful, Worthley advises, because if you make an impulsive change, you'll be stuck.

A change in investment adviser is a good opportunity to review your overall investment allocation, Hurley says.

Worthley agrees. "Things may have changed since you made your original investment choices. Your child is older and may be close enough to going to college that you want to be more conservative. By the time your child is a sophomore in high school, you want to move away from risk exposure, so it may be an opportune time to make a change," he says.

How to evaluate 529 plan options

When you're evaluating 529 plan options, consider these factors:

• Reputation of the investment companies. "How comparable is the new fund company to the old fund company?" Worthley asks. "If you're comparing, say, Fidelity to Vanguard, they aren't that different, although Vanguard has more index funds and the fees are lower."
• Costs. "Even if the fees are lower with the new investment manager, they still might be higher than other plans in other states," says Hurley. "Don't be afraid to go out of state if you can find a plan with significantly lower costs." Higher 529 plan costs add up, and every extra dime you pay in fees is one less dime you have to pay for college.
• Type of fund. While some investment companies offer more actively managed funds, other fund companies specialize in index funds, says Hurley. More 529 plans are moving to lower-cost, index-fund providers. So, if your 529 plan makes a change, you may be moving from actively managed funds to index funds, he adds. Actively managed funds are funds where the manager picks stocks or bonds according to an investment strategy, while index funds track the performance of a specific stock or bond market index.
• Age-based plans. Age-based 529 plans are a one-size fits all investment option. As your child gets older, the investments within the plan get more conservative. Still, there is wide variation among age-based 529 plans, says Worthley, so if you have an age-based plan, you'll want to compare the old plan with the new one to make sure it isn't more aggressive or more conservative than what you had before.
• State tax deduction: If you're invested in your state's 529 plan and get a tax deduction or credit and decide to move to another state's plan, you may lose that credit or deduction, says Worthley. Also, Hurley says if you take a state tax deduction and move the money out of the 529 plan, you have to declare the money you deducted as income on your state tax return.

Posted August 27, 2010