College Savings

Does Your 529 Plan Make the Grade?


Total assets in 529 college savings plans fell 21% in 2008, to $88.5 billion, according to Financial Research Corp. But these vehicles, whose name hails from the section of the tax code that allows the savings to grow federally tax-free if redeemed for a qualified higher education expense, remain a popular choice, with 2008 net sales exceeding $3 billion. Since 2004, total assets have swelled by more than 69%.

Still, the widespread losses incurred by the bear market have hurt 529 plans' performance. According to new data from Morningstar, 529 fund offerings that had 80% or more of assets invested in equities were down an average of 38.4% in the one-year period ended Mar. 31. Over the same period, the Standard & Poor's 500-stock index lost a slightly more modest 38.1%.

Even those investment offerings with little to no stock exposure—3% or less—lost 8.5% on average. "A lot of accounts for older children dropped a significantly," says savingforcollege.com founder Joe Hurley.

Oppenheimer Plans Fared Poorly

In Morningstar's (MORN) best and worst of 529 plans published Apr. 23, analyst Greg Brown also points out that some plans suffered big hits due to exposure to bond funds that bombed in 2008. In particular, many OppenheimerFunds-managed 529 investment options held Oppenheimer Core Bond (OPIGX), which lost more than 35% in 2008 due to non-agency mortgage investments. And the worst part? "Oppenheimer portfolios positioned closest to college were the ones holding the largest positions in these bond funds," notes Brown.

If anything, says Hurley, "The losses underscore the need to make sure you have the appropriate asset allocation for the age of your child."

Fortunately, the news isn't all negative. One plus from this mess, says Hurley, is that the market conditions have resulted in investment advisers increasing the number of fund options offered on the conservative end of the scale, including ones that invest in bank certificates of deposit and inflation-protected government bonds.

College Costs Rising Rapidly

With the cost of college continuing to increase at rapid rates, saving is more important than ever. A recent survey from the College Board reports that tuition, room, and board costs at public four-year institutions increased 5.7% in the 2008-09 school year, to $14,333. A year at a private college was more than twice as expensive, at $34,133.

This makes it all the more important to research before you buy into a 529 college savings plan—or to investigate to see if the 529 you currently own makes the grade.

Hurley's savingforcollege,com, which is owned by Bankrate.com (RATE), and collegesavings.com, a site from a nonprofit association representing states that administer 529 plans, are great places to go for quarterly investment performance, as well as information on fees, investment options, and state-specific tax advantages. Morningstar also provides summaries of each plan. (It does not rank them).

How the Funds in 529s Fared

Here are the average expense ratios and performance records for the various 529 fund offerings over the last year, three years, five years, and 10 years (through Mar. 31, 2009), according to Morningstar. When you're considering the type of investment among the various age categories, note that some funds are what Morningstar calls "Fixed Portfolios," which maintain an age-appropriate stock/bond allocation. In these types of funds, it is up to you to rebalance and move assets into more appropriate age-based funds as your child nears college. Meanwhile, "Progressive Portfolios" automatically shift holdings to become more conservative as a child ages. Morningstar also tallied the average performances of funds by percentage allocated to equities.

  Average expense and performance* of Fixed Portfolios** by age group

Fixed Portfolios by Age Group Average Expense (%) YTD Return 1-Yr Return 3-Yr Return 5-Yr Retrun 10-Yr Return
0 to 8 1.2 -6.7 -30.1 -10.1 -2.3 1.5
9 to 16 1.1 -3.0 -13.4 -1.2 1.6 2.5
11 to 15 0.5 -3.9 -14.2 -1.6 0.9 4.2
16 to 20 0.8 -2.0 -6.6 1.0 1.9 4.2
17+ 1.1 -0.8 -4.6 0.2 1.7 2.9
21+ 0.7 -0.5 -2.1 2.3 2.5 4.2

  Average expense and performance* of Progressive Portfolios*** by age group

Progressive Portfolios by Age Group Average Expense (%) YTD Return 1-Yr. Return 3-Yr Return 5-Yr Return 10-Yr Return
6 to 8 0.7 -6.6 -27.1 -8.9 -2.2 -0.5
9 to 11 0.7 -5.1 -21.3 -6.3 -0.9 0.3
12 to 14 0.6 -5.4 -23.1 -3.7 0.2 1.2
15 to 17 0.6 -3.8 -16.2 -1.9 1.0 1.8
18 to 20 0.8 -1.8 -7.6 -1.1 0.9 2.2
19+ 0.5 -0.6 -5.6 0.9 2.7 5.7
20 to 23 0.6 -1.8 -8.1 -1.5 0.3 2.4
21 to 24 0.6 -1.8 -8.1 -1.5 0.4 2.7
23+ 0.9 -2.7 -17.7 -4.1 -0.4 2.6

  Average expense and performance* of Funds by Percentage Equity Allocation

Funds by Percentage Equity Allocation Average Expense (%) YTD Return 1-Yr Return 3-Yr Return 5-Yr Return 10-Yr Return
0% to 3% 0.6 -0.5 -8.5 -0.5 0.9 3.6
3% to 50% 0.9 -4.0 -19.4 -4.2 -0.3 2.5
50% to 80% 0.9 -6.8 -30.1 -9.4 -2.3 3.1
80% to 97% 1.0 -9.1 -38.4 -13.9 -3.7 2.7
97% to 100% 0.8 -10.1 -38.4 -14.7 -5.2 -2.4

*As of March 31, 2009; multiyear returns are annualized

**Stock/bond allocations remain fixed.

***Allocations shift to become more conservative as the child nears college age.

Data: Morningstar

Kalwarski is Numbers department editor at BusinessWeek.

Kalwarski is Numbers department editor at Bloomberg BusinessWeek.

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