A 529 plan (also known as a qualified tuition plan) is a tax-advantaged way to contribute to your child’s college savings. While each state offers its own 529 plan, not all plans are created equal. The investment options and flexibility available within each plan will differ somewhat, so it’s important to do some research before choosing what plan to contribute to. Remember, you aren’t restricted to your state of residence’s plan, so shopping around can be beneficial. Learn about your options before investing in a 529 plan so that you can choose the plan that best fits your college savings needs.
529 Investment Basics
Each plan will offer several portfolio options. When you invest in a 529 plan, you are buying units of whichever portfolio you choose (rather than individual shares of a mutual fund or security). This means when you open an account, you’ll simply choose the type of investment portfolio you want, and a professional investment manager will handle your investments from there. You can decide to roll your 529 plan over into a different college savings plan account or to reallocate your investments within a 529 plan, but you can only do either twice per calendar year. You can also reallocate your investment options if you change the designated beneficiary of the plan.
Investment options will vary from plan to plan and even within plans, but some of the typical options can be seen in the following list:
Age-based portfolios: This type of portfolio will offer investment strategies based on your child’s age. Asset allocation will automatically grow more and more conservative as your child approaches college age.
Single-fund portfolios: This type of portfolio will invest in a single mutual fund, which you can choose based on your preferred risk tolerance and asset allocation.
Multi-fund portfolios: This type of portfolio invests in multiple mutual funds that target a specific asset allocation, usually with a specific goal such as growth or preservation. Both multi- and single-fund portfolios are known as “static” options because they are not programmed to change asset allocation over time, as age-based portfolios are.
Within these options, there will be choices provided by the plan related to your time horizon and risk tolerance. For example, within multi-fund portfolios, there may be three choices based on whether you want an aggressive, balanced, or conservative asset allocation. Within age-based portfolios, you may have options based on both time horizon and asset allocation; if your child is ages 0-8, your options for aggressive, balanced, or conservative may be vastly different than those same asset allocations if your child is age 16 or above (generally, all asset allocations will grow more conservative as your child ages).
529 Fees and Expenses
Depending on how you invest in a 529 plan, you will have to pay various fees and expenses. These should be carefully considered before investing since they will slightly lower your returns. Consider the following types of fees you may be subject to:
Account maintenance fees: Usually assessed as an annual flat fee; some states will waive these fees for residents.
Estimated underlying fund expenses: Charged to cover the cost to invest your portfolio in any underlying mutual funds.
State fees: Charged by the state agency offering the plan to cover the state’s cost to administer the plan.
Asset-based management fees: Will be charged as a percentage of the assets under management and usually is taken directly out of your account.
Unit fees: If you invest through a broker, you will pay different types of fees (often referred to as “sales loads”) depending on the type of shares you buy (often called the shares’ unit class). The broker you work with should be able to tell you more about the specifics of these fees based on the plan you choose.
Fees can vary widely among plans, so it’s important to consider several options and calculate potential fees and expenses for those options before choosing a plan.
Choosing a 529 Plan
Before choosing a 529 plan, you should discuss your risk tolerance and overall college savings strategy with both your family and your financial advisor. You should also consider how much control you want over the plan and how often you will want to reallocate assets. If you have a very low risk tolerance, you may want to choose a conservative multi-fund portfolio. However, if you’re starting to save when your child is quite young and want to keep your risk low while also allowing for higher growth during younger years, you may want to look at a conservative age-based portfolio. Age-based portfolios are also convenient for investors who want a hands-off approach. Investors who want to have the flexibility to reallocate will likely not want to be locked in to an age-based plan—however, keep in mind that you can only reallocate twice per calendar year.
The amount you have saved for your child’s education, as well as the ways you’ve saved, will also likely affect your investing strategy within a 529 plan. For example, if you are saving in several other ways, such as with a combination of a savings account, another investment portfolio, and a trust or if you have a large amount saved in just one other savings account, you may feel more comfortable choosing a more aggressive option for your 529 plan. However, if you’re depending largely on your 529 plan to fund your child’s education, you will likely want to be more conservative. Your TrueNorth Wealth advisor can help you decide which 529 plan may be best for your college savings needs.