Alts key to de-risking 529 plans: J.P. Morgan

Alternative investments provide diversification for conservative vehicle; try finding plans that offer them, though

Jul 15, 2013 @ 11:37 am

By Liz Skinner

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Advisers should prioritize investment mix and flexibility when pondering which college savings plans are right for clients, according to J.P. Morgan Asset Management, which runs New York's adviser-sold college savings plan.

In advice the firm is publishing later this month, J.P. Morgan suggests that advisers examine whether plan investments extend beyond stocks and bonds. Alternatives like real estate, and emerging-markets and high-yield bonds are attractive additions.

Advisers should make sure the allocations in clients' 529 plans — even fixed-income allocations — are diversified. Such diversification helps mitigate duration risk and generate more income, the firm said in an early copy of “Evaluating 529 Plan Investment Portfolios.”

“The 529 has become the premier way to save for college and it's a great tool for advisers, but many folks think that they all look alike,“ said Michael Conrath, 529 program director for J.P. Morgan. “They may seem like it at the high level, but not all 529s are created equal.”

Americans have about $166 billion invested in the nation's 86 different 529 plans, according to Morningstar Inc. Investments in the plans, which are sponsored by states, grow tax-free as long as the funds are spent on college expenses.

Only a handful of firms offer alternative investments in Section 529 plans, according to Paul Curley, director of Strategic Insight's college savings plan research. Those include the New York plan with J.P. Morgan investments and New Mexico's adviser-sold plan Scholar'sEdge, which added alternative investments in May.

J.P. Morgan also recommends that advisers examine whether the investments in college savings plans are tactically managed, allowing the managers flexibility to make important adjustments to take advantage of opportunities or avoid risks, Mr. Conrath said.

He said this feature, not found in many 529s, is especially important because investors are legally allowed to make changes to their investment options only once a year.

The three pages of recommendations also include making sure plans offer glide paths that fit with clients' risk tolerance and that portfolios include a mix of funds with low correlation to each other.

Although the written guidance doesn't mention performance, Mr. Conrath said families are using these plans to try to accumulate enough dollars to combat rising tuition and fees and performance must be examined.

“As a parent, I want to look at who is actually managing the money for my three kids,” Mr. Conrath said. “I want to know how the 529 has performed and whether this manager oversees similar portfolios in other spaces, such as retirement, and have those portfolios delivered in other areas.”


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