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529 E-ditorials

04-5: A Model 529 Plan
Joe Hurley
Tuesday, October 26th 2004

You've probably never heard of this particular 529 plan:

- It doesn't appear on any of the "best of" lists you find in financial magazines and other web sites.
- Although it has been around for a while and is available to residents of any state, it attracts little new money.
- It gets overshadowed by another, nearly-identical, 529 plan from the same state.

The program I am talking about is the University of Alaska (UA) College Savings Plan, which to my way of thinking is pretty close to being a model 529 savings program. (Its twin, by the way, is the T. Rowe Price College Savings Plan). The UA 529 program is special because of its investment option called the ACT Portfolio. You won't find this option, or anything else just like it, in any other 529 plan.

The ACT Portfolio is a 529 savings program and a prepaid tuition program at the same time. Like other savings programs, your contributions are invested in underlying mutual funds, in this case from T. Rowe Price, and you take withdrawals from your account when it comes time to pay for college. But here's the twist: Any portion of your investment used to pay tuition at UA is guaranteed to keep pace with UA tuition increases. This is a no-lose deal for parents of a future UA student. If their investment in the ACT Portfolio grows faster than UA tuition, it will be worth more than a straight prepaid tuition plan would be worth. If it does not keep pace, the state of Alaska is on the hook for the difference.

You may be thinking: "My kid is not going to attend the University of Alaska, so what good is that guarantee going to do me?" Indeed, for most of us living outside Alaska, the odds of calling on this guarantee are slim. But who really knows? Even if you're not attracted by the guarantee, you may be interested to know that an investment in the ACT Portfolio incurs no fees beyond the underlying fund expenses, making it one of the least expensive fund-based 529 investments available anywhere in the 529 universe.

I am not suggesting that everyone go out and invest in the ACT Portfolio. It currently targets a relatively conservative mix of investments, 72% in bond and money market funds and 28% in stock index funds. Other direct- and adviser-sold 529 plans have investment options and features that may be more appropriate for your college savings goals. (It's interesting to me, and perhaps instructive, that the state selected this particular blend of funds in the ACT Portfolio to hedge the risk of UA tuition increases).

What I appreciate most about the UA College Savings Plan is that families are able to lock in tuition without giving up the investment upside. The state of Alaska makes a commitment, through the ACT Portfolio, to prevent in-state tuition from outpacing a family's savings. Because the University of Alaska is state-owned, and not just state-supported, the guarantee can be considered as coming from the university itself. I cannot think of another 529 savings program so directly tied to the state's own public system of higher education. The prepaid tuition programs found in other states have similar goals, and some even offer a state-backed guarantee, but they lack the direct tie to the public higher education system, and they also lack the investment component of the ACT Portfolio.

Earlier this week, U.S. Senator Peter G. Fitzgerald (R-Ill), chairman of the Senate Governmental Affairs subcommittee on Financial Management, the Budget, and International Security, sent a letter to the Treasury Department requesting that Treasury officials consider making recommendations for legislation that would remove the states from the 529 business. This comes on the heels of a Senate hearing focusing on the extra layer of fees, added confusion, and lack of federal regulation of state-sponsored 529 plans. The states must respond appropriately to this challenge if they want to retain their programs. State income tax benefits, matching contributions, rewards programs, community education and outreach, and other perquisites that states can attach to their 529 plans are all terrific, but unless involving a significant number of lower-income families, they may not be enough to convince skeptical policymakers in Washington.

If every state had an ACT-like Portfolio, however, I doubt anyone in Congress would be questioning the role of the states in establishing and maintaining 529 savings programs.

» 05-4: The 529 marshals have arrived - 08/30/05
» Our 5.29th-year anniversary - 06/29/05
» 05-2: 529s and the new Bankruptcy Act - 04/28/05
» 05-1: Reform or Deform? - 02/27/05
» 04-6: Perspectives on the 529 debate - 12/28/04
» Show All Archives


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