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Time to get conservative in your 529?

Posted: 2009-04-24 - Melissa Ezarik is a writer based in Connecticut

by Melissa M. Ezarik

Not too long ago, putting 529-plan money in aggressive investments even as college years approached may have seemed like a solid plan with a payoff.

Now more and more families are looking to salvage what's left of their college savings by running as far from aggressive as they can.

"Conservative is the word right now," says Carol L. Bassin, a financial adviser representative for Strategic Planning Group, an office of MetLife.

Ray Lucia is also seeing an interest in safety. "People are becoming more conservative and they are switching to what they perceive to be safer investments," says Lucia, who answers money questions from listeners in more than 80 U.S. markets during his daily radio show on the Business Talk Radio Network.

Brad Lazarus, who runs Chicago-based Omega Advisors, an as-needed, hourly financial planning firm, calls moving assets to a safe haven a common interest these days and "an emotional reaction in a bear market. Parents are surely becoming more interested in this idea and I am sure they are implementing this strategy around the country."

The conservative path

Take FDIC-insured CDs within the state-sponsored plans in Arizona and Montana for example. Offered by College Savings Bank, a Pacific Life Company, sales of these CDs increased by more than 90 percent in 2008, reports Dan Davenport, chief marketing officer for the bank. "As you can imagine, 2009 has been just as busy."

Within most 529 savings plans, there is no lack of options for the conservative-minded from CDs and money market funds to principal-guarantee options. Interest rates are competitive with similar investments made outside of a 529, but interest earned is tax free, provided the money eventually is used for qualifying college expenses, says Joe Hurley, founder of

"A conservative allocation is most suitable for parents with a short-term time horizon, who cannot afford the volatility of market swings and potential losses," says Lazarus. He and other financial advisers define "short term" as within the next five to seven or five to 10 years, depending on whom you ask. Peter Miralles of Atlanta Wealth Consultants suggests those with a short-term time horizon put, "money in the most conservative options you can right now when it comes to 529 plans."

Does conservative still mean safe?

It's a good question. "Understand that 'conservative' does not mean that you will make money in a given month, quarter or year. Many conservative funds lost money in 2008 some quite a bit!" says Todd Sivak, a Certified Financial Planner for Integrated Financial Solutions in Wisconsin.

Steven J. Bloch, CFP and managing partner of California-based MHB Financial Group, uses Utah which he says has "one of the better funds with respect to expenses" as an example. In the first three months of 2009, "almost every investment choice, 100-percent bonds being the only exception, lost money."

As Christopher S. Penn, chief media officer for Edvisors and producer of the Financial Aid Podcast points out, "Given the market conditions, even the 'recession-proof' plays aren't safe for preservation of capital." He advises listeners who need cash in hand in two years or less to get out of any form of savings that isn't FDIC-insured.

Conservative concerns

Financial advisers caution of the potential missed opportunities of going conservative in a 529. "One of the challenges of being a financial adviser is respectfully persuading my clients that their instincts are not always in their best interest long term," says Carol Fabbri, managing partner of the Colorado-based firm Fair Advisors. "People see their 529 accounts go down and want to go into more conservative investments because they fear for their children's educations." In her opinion, the best solution for parents of children under age 10 is investing more right now, if they can afford to.

She likens the decision to shopping. "If there was a 50 percent off sale for something that you really needed and you didn't know if the price was going to go lower or if the discount would go away, would you buy it?"

Lazarus refers to the shift from aggressive/moderate investments into conservative funds out of fear "a dangerous move" that guarantees a loss, "effectively moving into a vehicle that will provide minimum upside when the market rebounds."

Paul Escobar, the lead consultant for Boston-based Eskie Specialty Advisors, says those who now are talking about a conservative shift already have missed the boat. "The time to have done that was last summer, when the Dow Jones Industrial Average was at 11,500. Swapping to more conservative as the Dow is in the 7,500 range is a sure way to lock in losses and miss any appreciation in the markets, should they recover in the next few years before the assets are needed," says Escobar.

Just do it?

Besides having a close time horizon and then putting those cautions aside, there are still other times when going conservative in a 529 is the right move such as if the plan was allocated too aggressively in the first place, says Lazarus. Or perhaps it just feels right.

"Do it if that makes you feel comfortable right now, but be sure to review it each year with your financial adviser to make sure it makes sense next year," says Bassin.

Fabbri gives the age-old investment advice of seeking good diversification and low fees. Ideally, any switching of investments should be done within the existing plan, says Miralles. After analyzing your risk tolerance, timelines and deciding on the appropriate asset allocation, explore your investment options.

To compare conservative offerings from various plans, check out our "static investment options".

However tempting it may be to sample different types of investments as the mood strikes, advisers recommend staying the course. "Most importantly, whatever your plan, stick to it," says Sivak. "Do not change it every time the market is up or down." With any luck, the payoff will come.

Posted April 24, 2009

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