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5 ways to compare your 529-plan performance
Joe Hurley is the founder of SavingForCollege.com.
How's your 529 plan performing?
If you answered "Much better, thank you!" you're not alone.
Of 2,926 portfolios tracked by Savingforcollege.com that have at least one year of performance history, 2,862 or 98% percent posted positive total returns for 2010. Compare this to the year 2008 when 89% of the portfolios lost value.
However, simply seeing that your 529 investment gained or lost value is not the best way to judge its performance. The allocation of your account among stocks, bonds, and money-market funds, the overall trends in the market, and the level of "risk" in your portfolio are all important factors.
5 ways to compare 529 plans
- Compare to broad market indexes
- Compare to the plan's own benchmarks
- Assess the performance of the underlying mutual funds
- Compare to similar portfolios in competing 529 plans
- Check Savingforcollege.com's 529 Performance Rankings
Here are five ways to judge your 529 plan's performance.
Compare to broad market indexes
An easy way to check your 529 plan is to compare the performance of your investment option to one or more broad market indexes. You can find the performance of your portfolio on the plan Web site's investment performance page or in quarterly reports the plan sends you. For example, if you use the 100 percent equity option in your 529 plan, and you see its value went up 16%, you will know that it did slightly better than the S&P 500 Index (up 15.06% percent in 2010).
Other popular stock indexes and their 2010 results include:
- Dow Jones Industrials Average -- up 14.06 percent
- Russell 2000 Index -- up 26.85 percent
International stock funds often are compared to the MSCI EAFE Index -- up 7.75 percent. The MSCI EAFE is a stock market index of foreign stocks viewed from the perspective of a North American investor.
For bond portfolios, a popular index for comparisons would be Barclays Capital U.S. Aggregate Bond Index -- up 6.54 percent. Cash and short-term portfolios can be compared to the Citigroup 3-Month Treasury Index -- up 0.13 percent -- or the Lipper Money Market Fund Index -- up 0.03 percent.
You can compute your own weighted-average blend of index performance to measure 529 portfolios that are invested in a mix of stocks, bonds, and short-term instruments.
Increasingly, 529 savings plans are employing index funds as the underlying investments in their portfolios. By definition, an index fund should closely track the performance of the index it mimics. Usually, but not always, the fund's performance will be lower than the associated index simply because the fund incurs management, operating, and trading expenses.
Compare to the plan's own benchmarks
In reviewing the effectiveness of its outside program managers, the board in charge of a 529 plan will usually compare plan performance against benchmarks that both the board and the outside managers agree are most appropriate for each of the plan's investment options. The benchmark indexes may be different from the broad market indexes mentioned above. Reviews take place annually, semi-annually, or quarterly, depending on the policies of the board.
Seeing how the plan performs against its selected benchmarks should be useful to you as the investor. Unfortunately, it's not always easy for you to obtain this information, and even if you do, the data may be stale by the time you see it. Rarely do 529 plans display the benchmark performance alongside the actual plan performance posted on their websites. The D.C. College Savings is one of the few exceptions (It would be nice to see more plans following the example of the District of Columbia.
More typically, 529 plans will publish an annual report containing benchmark comparisons, but you may have to search hard to find them. For examples, look at annual reports from this Fidelity-managed 529 plan in California and these Wells Fargo-managed plans in Wisconsin. The Maryland College Investment Plan, managed by T. Rowe Price, also includes its benchmarks comparisons in an annual report, but makes the report easier to find by including a link to it from its current performance web page.
Assess the performance of the underlying mutual funds
You can research the performance of the funds that make up a 529-plan portfolio. All you need to know is the ticker symbol of the fund, and you can research it on the mutual fund's Web site or on an independent site such as Morningstar. You may reasonably conclude that a 529 plan using highly rated mutual funds is preferable to a plan with lower-rated mutual funds.
However, several problems arise with this approach. One is that 529 plans can (and often do) make changes to their portfolios, replacing one mutual fund for another. By focusing only on the current mutual funds, you are failing to assess the skill of the plan manager in selecting and maintaining the portfolios over time.
Another problem with judging your 529 plan solely by the performance of its underlying mutual funds is that 529 plan expenses are not factored in. Because expenses vary widely among 529 plans, your analysis may be misleading.
And finally, it's important to recognize that not all 529 plans use registered investment companies, i.e. mutual funds, as their underlying investments. Florida's 529 savings plan, for example, hires money managers to invest the plan's portfolios separately. A few other 529 plans use "private" funds that are not publicly-traded and hence do not come with ticker symbols.
Compare to similar portfolios in competing 529 plans
Let's say the target allocation of your 529 plan is 60 percent stocks and 40 percent bonds. Why not just compare its performance to all 529 portfolios with the same 60/40 target allocation? This way, you'd be comparing apples to apples, with all asset-based expenses appropriately factored in.
Savingforcollege.com takes this approach in comparing plan performance. We identify the portfolios in each 529 plan that best represent seven different asset-allocation targets. These asset-allocation targets, and the average (median) performance for the 12 months ended December 31, 2010 are as follows:
Asset-allocation target Median performance 100 percent equity, 0 percent fixed Income: +14.84% 80 percent equity, 20 percent fixed Income: +13.73% 60 percent equity, 40 percent fixed Income: +12.06% 40 percent equity, 60 percent fixed Income: +9.97% 20 percent equity, 80 percent fixed Income: +6.76% 0 percent equity, 100 percent fixed Income: +6.30% 100 percent cash or short-term: +0.03%
Is our system perfect? Not by any means. For some 529 plans we found no suitable portfolios for certain asset-allocation categories. Also, some plans use "target-based" funds in their age-based options, so that the asset allocation will shift to a more conservative profile over time. This tends to skew longer-term comparisons with plans using "fixed" or "static" portfolios.
Check Savingforcollege.com's 529 Performance Rankings
Once we score a plan's performance in the seven asset-allocation categories listed above, we compute an average score to produce an overall, or "composite," ranking score. Each quarter, we display the plans in order of ranking. While the composite rankings are helpful in comparing overall plan performance, it may not give you the information you need about a particular portfolio.
Remember that past performance is not a guarantee of future returns. Based on our own 529-performance tracking, it is obvious that the markets favor different investment styles at different times. Approaches that fared well in the 1990s are different from those that have done well in this decade.
Here are a few other things to keep in mind:
- Expenses are important when comparing 529 plans, but bottom-line performance after all expenses is even more important. Expenses may include program-level management and administrative fees, underlying fund expenses, and annual or quarterly account maintenance fees. For 529 plans sold by financial advisers, there may also be a sales charge. (Note: all performance statistics included in this article are exclusive of any sales charges)
- Performance data does not indicate the risk, or volatility, of an investment portfolio. Further analysis is required to assess the level of risk, usually expressed as the investment's "beta."
- You should factor in a state income tax deduction or credit for your contributions to a 529 plan when comparing 529 plans. In many states, the tax benefit is available only for the in-state 529 plan. The tax savings effectively increases the return of your investment (or decreases the expenses, depending on how you prefer to look at it).
- In the view of many investment professionals, 529 portfolios have not been around long enough to provide meaningful investment data. Comparing performance over a period as short as 12 months may not be a good indicator of the investment manager. In addition to its one-year rankings, Savingforcollege.com also ranks performance over three and five years where such performance history is available.
Updated February 10, 2011