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Understanding 529 Investment Options
by Joe Hurley, founder,
Tuesday, December 13th 2016

529 savings plans are not mutual funds, yet to many of us they look and act like mutual funds. Indeed, the majority of 529 plans invest in mutual funds. But if you scout around, you will find some other types of investments in 529 plans, including separately-managed accounts; equity-indexed investments; state-managed fixed-income pools; and guaranteed investment contracts. Banking products, including certificates of deposit, can also be found in a small number of 529 plans, and will soon be featured in more. (CD options in Ohios CollegeAdvantage program were successfully launched last month.)

Generally speaking, 529 savings plans are composed of portfolios. Each portfolio consists of one or more mutual funds, certificates of deposit, etc. When you choose an investment option for your contributions, you are selecting the portfolio in which those contributions will be invested. Here are the most common types of investment options:

Individual fund portfolio
Sometimes called a single-fund option, this is a portfolio invested in a single mutual fund. Often the name of the 529 portfolio is very similar to the name of the underlying mutual fund. A large number of broker-sold 529s offer an extensive line-up of individual fund options, while a smaller number of direct-sold 529s offer them.

Multi-fund portfolio
Alternatively labeled a target portfolio, asset-allocation portfolio, or blended-fund portfolio, this is a portfolio invested in two or more mutual funds. Most multi-fund portfolios target a specific stock/bond mix (e.g. 80% equity) and stick with that target allocation over time. The 529 program manager may rebalance and/or replace the underlying mutual funds as it deems appropriate. Some multi-fund portfolios use mutual funds from the same mutual fund family, while others feature a multi-manager approach that blends funds from different fund families.

Static option
This refers to an investment option that is not programmed to change over time. The individual fund portfolio and multi-fund portfolio described above are static options. So are many portfolios that do not use mutual funds, such as stable-value options, guaranteed options, CD options, etc.

Age-based option
Sometimes referred to as the enrollment-based option, this is an investment approach where your asset allocation is programmed to change over time. Accounts for young beneficiaries are invested aggressively and accounts for beneficiaries with college right around the corner are invested much more conservatively. In some 529 plans, the age-based option operates by automatically transferring your investment from one static portfolio to another at certain points in time. Others utilize lifecycle funds or employ lifecycle-type tactics within the portfolio containing your investment so that it is not necessary to transfer your investment between portfolios.

Investment averaging option
Only a handful of 529 plans offer you an option to pre-program a transfer of your funds between available portfolios at particular points in time. This can be attractive for those who subscribe to dollar-cost averaging as a way to reduce market risk. For example, you can choose a money-market portfolio or some other conservative investment option for your initial contribution and have your investment automatically moved in stages to a more aggressive portfolio.

Can I switch my investment around?
The IRS permits you to change investment options in your 529 account whenever you change the beneficiary designation on that account, but only one time in a calendar year if there is no beneficiary change. The portfolio changes made automatically under an age-based option or investment averaging option are not counted for this purpose.

A few words about expenses
The expense ratio of a 529 portfolio includes the expenses of the underlying investments plus the expenses levied at the portfolio level for program management and state administration fees. These expenses are detailed by the 529 plan in its official offering materials. Comparing fees and expenses between 529 plans can get a little tricky, but our 529 plan details pages attempt to lay them out in as consistent and understandable manner as possible.

» Claiming a state income tax deduction - 12/20/16
» Understanding 529 Investment Options - 12/13/16
» Should you open an UGMA/UTMA 529? - 02/06/08
» Understanding your state's slice of 529 fees - 12/13/07
» Planning for the new "kiddie tax" - 10/30/07
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