Why are 529 plan investment managers switching from age-based asset allocations to enrollment-date portfolios? What’s the practical difference between the two types of dynamic investment plans?
Both age-based and enrollment-date investment options reduce investment risk by changing the asset allocation as time passes, but they do this differently.
- An age-based investment glide path changes the percentage equity in a 529 plan investment by moving the money from one portfolio to another as the child grows older.
- An enrollment-date glide path changes the percentage equity in a single portfolio periodically.
What are the advantages of each method of providing a dynamic 529 plan portfolio?
Advantages of Age-Based Asset Allocations
Since the composition of the portfolios in an age-based asset allocation do not change, it is possible to evaluate the historical performance of the portfolios. In particular, it can be useful to consider how the portfolio performs in good markets and bad markets.
The enrollment-date funds are constantly changing, so it is not easy to compare the portfolios based on last year’s performance.
The use of separate portfolios for each age band makes it easier to evaluate how the mix of investments changes. If the 529 plan’s investment manager decides to change the initial or final percentage equities, this will be easier to detect in an age-based investment. With an enrollment-date portfolio, the percentage equities is always changing, so a shift to a more or less aggressive strategy is harder to detect.
It is easier to compare the glide paths of age-based portfolios in different 529 plans.
Advantages of Enrollment-Date Portfolios
Some 529 plans claim that enrollment-date portfolios provide parents with more flexibility, letting them choose an enrollment year that matches their risk tolerance. An enrollment date further in the future will involve a higher percentage equities.
But, you can also adjust the investments in an age-based investment option to match your risk tolerance by choosing a portfolio based on older or younger age groups instead of the child’s actual age.
Another difference is the frequency of adjustments to the percentage equities. Enrollment-date portfolios allow investment managers to make asset allocation adjustments throughout the year.
Age-based portfolios make adjustments less frequently, typically every 2-3 years, when the investment is moved to the portfolio for the next age group. Age-based investment glide paths typically have 5-10 age bands, with nearly two-thirds having 8 or 9 age bands. A more frequent, gradual shift in the asset allocation of an enrollment-date portfolio avoids a market timing risk associated with changes in the percentage equities. But, the number of age bands does not seem to affect investment performance.
Enrollment-date portfolios make it easier to adjust the investment horizon when saving for a private K-12 education. For example, if parents want to send their child to a public elementary school and a private high school, they can save for the private school by picking an enrollment-date portfolio based on the date the child will enroll in the private high school.
An enrollment-date portfolio is better for children who have skipped a grade or who have been held back a year. For example, children who were born around the cutoff date for school enrollment (typically in late August) might be the oldest or youngest child in their grade. A portfolio based on the child’s age might not match the year the child will enroll in college.
Investment managers may also be more comfortable with enrollment-date portfolios because they are similar to the target-date funds used for retirement savings.