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 your child’s age and your risk tolerance. 529 plans generally offer at least one of the following types of investment options:
OPTION 1
Age-based and enrollment date portfolios
These portfolio types are best for savers who prefer to “set it and forget it.” The portfolio’s asset allocation will automatically adjust over the plan’s life based on the child’s age or time until expected college enrollment. In the early years, the portfolio is typically more aggressive, with a higher allocation to stocks, which have the potential for higher returns but also come with higher risk.
As the child gets closer to college, these portfolios shift away from riskier investments, such as equities (stocks), toward more conservative investments, such as bonds or money market funds. This shift to less-risky holdings helps protect against volatility and market downturns when college expenses are imminent.
OPTION 2
Static portfolios
The portfolio’s asset allocation focuses on achieving a specific investment objective. It will remain the same over the life of the plan unless the plan owner chooses to reallocate to other portfolios manually, which is best for more experienced investors. Static portfolios include:
Target risk portfolios
Focus on a defined risk or investment strategy level, such as “aggressive growth” or “income.”
Individual portfolios
Mirror an underlying mutual fund, exchange-traded fund or other investment.
Which portfolio type is best?
Families who don’t want to worry about managing their investments will often choose an age-based option. However, remember 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.
529 Investments for a K-12 Tuition
Since January 1, 2018, 529 plans can also be used to pay for up to $10,000 per year for tuition expenses at private, public, and religious elementary and secondary schools. However, at this time, 529 plans only offer age-based portfolios designed to save for college. Therefore, age-based portfolios likely aren’t suitable for those saving for K-12 tuition.
Parents interested in using a 529 plan to pay for K-12 tuition may want to consider a portfolio heavily allocated to fixed income since they have a shorter time horizon than someone saving for college. Or they may consider an enrollment date portfolio with a target date set for when they wish to use 529 funds for K-12 tuition.
Investment choice during college
Once a child is enrolled in college, there are two common strategies for investment allocation.
STRATEGY 1
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 has 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 investing, the greater the potential return, the greater the risk. Both Fidelity and TIAA have used this strategy in their 529 plan portfolios.
STRATEGY 2
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 potential return in the later years, but there is less risk of losing principal, which will be needed to pay tuition. Utah and Virginia have employed these strategies in their portfolios to limit the risk potential 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 your chosen investment type, pay attention to the costs. Fees and expenses can eat away at your investment returns and shrink your education savings. Fortunately, many 529 plans have been reducing their fees, and there are many low-cost options. It’s always a good idea to compare fees before deciding which 529 plan and investment portfolio to choose.
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. You can click “See Investment Options” to view the portfolio options in any given plan, including information on fees, performance, and more.
