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Age-based investment options show wide variation
Joe Hurley * Savingforcollege.com
Most 529 savings plans offer one or more "age-based" options that automatically shift from stock-weighted portfolios to fixed income-weighted portfolios as the beneficiary approaches college age. The idea, of course, is that your college savings should be less exposed to swings in the market as the time for taking withdrawals gets closer. This approach should protect parents with older children, while allowing parents of younger children to capture greater returns over time by maintaining a higher concentration in stocks.
Savingforcollege.com's study of 529 plans conducted in November 2008 found, however, a significant variation among 529 plans in the asset-allocation approach underlying the age-based options. Some plans are very conservatively invested 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.
Naturally, in the current bear market, those accounts with significant exposure to stocks (and in many cases those with significant exposure to bonds) have taken quite a hit. 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 Since most 529 accounts will be withdrawn over a period of four or more years, market conditions may turn much more favorable for stocks before the account for a college student is totally withdrawn.
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. The study has been updated to include 12/31/2008 investment performance data.
Our newest poll asks how you would want your account allocated between stocks, bonds, and money market funds with one year or less before your child begins college. Please register your opinion by submitting your response to the poll.
Posted November 14, 2008
Joe Hurley is the founder of SavingforCollege.com, and a certified public accountant.
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