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How do I select the right investments for my 529 plan?Updated: 2016-07-29
Table of Contents
- What is a 529 plan?
- Are 529 plans only for my state's public colleges?
- Name the top 7 benefits of 529 plans
- Does a 529 plan affect financial aid?
- What is the penalty on an unused 529 plan?
- Are there gift & estate tax benefits for 529 plans?
- Can I have 529 plans from multiple states?
- How do I select the right investments for my 529 plan?
- Which is the best 529 plan available?
- What are the top-performing 529 plans?
When you enroll in a 529 college savings plan, you'll need to select an investment portfolio from one of the choices offered by your plan. You'll want to consider factors such as the age of your child and your tolerance for risk. 529 plans generally offer at least one of the following types of investment option:
- Age-based portfolios: The asset allocation of the portfolio will automatically adjust based on the child's age over the life of the plan. In general, these portfolios shift away from riskier investments, such as equities (stocks), toward more conservative investments, such as bonds or money market funds, as the child gets closer to college; best for savers who prefer to "set it and forget it".
- Static portfolios: The asset allocation of the portfolio is focused on achieving a specific investment objective. It will remain the same over the life of the plan, unless the plan owner chooses to manually reallocate to other portfolios; best for more experienced investors. Static portfolios include:
- Target risk portfolios - Focus on a defined level of risk or strategy, such as "aggressive growth" or "income"
- Individual portfolios - Mirror an underlying mutual fund, exchange-traded fund or other investment
Families who don't want to worry about managing their investments will often choose an age-based option. Keep in mind, however, that the level of risk involved with an age-based portfolio can vary greatly. It's important to understand the level of risk the portfolio will take on, e.g., conservative, moderate or aggressive, and match it against your risk tolerance and objectives. Two common strategies include:
More potential return during college
During a child's college years, some portfolios have a sizable allocation to equities. These plans might be ideal for someone who had a late start to saving and needs to make up for a shortfall, since equities are more aggressive investments with greater potential for return. But remember that when it comes to investing, the greater the potential return, the greater the risk. Both Fidelity and TIAA-CREF have used this strategy in their 529 plan portfolios.
Principal protection during college
More commonly, age-based portfolios focus on protecting the principal investment (the amount you contributed) and will allocate toward cash and other fixed income investments while the child is in college. These portfolios will have little if any potential return in the later years, but there is less risk of losing principal, which will be needed to pay tuition. Both Utah and Virginia have employed these strategies in their portfolios to limit potential for risk when the beneficiary is in college.
Even if you choose an age-based portfolio, it's a good practice to check in on your 529 plan investment regularly, and re-assess whether you are in the right portfolio as your personal, financial or geographic situation changes.
A word on fees
Regardless of the type of investment you choose, be sure to pay attention to the costs. Fees and expenses can eat away at your investment returns and shrink your savings. Fortunately, many 529 plans have been reducing their fees and there are many low-cost options to choose from. It's always a good idea to compare fees before deciding which 529 plan and investment portfolio to choose.
RELATED: Understanding 529 expenses
Find out more about the investment options your 529 plan offers You can see the details of the underlying portfolios of a particular 529 plan by visiting your selected plan's detail page and scrolling down to the Investment Options section. There you can click on "See Investment Options" to view the portfolio options in any given plan, including information on fees, performance, and more.