Age-based funds dominate 529 plans

Oct 29, 2007 @ 12:20 pm

By Charles Paikert

Age-based mutual funds appear to have firmly cemented a commanding position as the investment option of choice in Section 529 college savings plans, according to industry executives at the annual 529 Technical Conference in Las Vegas last week.

About 75% of the plans offer age-based options, said consultant Marc Friedberg, a Pittsburgh-based managing director for Wilshire Associates Inc. of Santa Monica, Calif.

"We are strong believers in age-based options," said John Heywood, principal of The Vanguard Group of Malvern, Pa., one of the industry's biggest investment managers with more than $20 billion in assets. More than 50% of those assets are in age-based funds, Mr. Heywood noted.

At Fidelity Investments of Boston, more than 70% of the $17 billion held in 529-plan assets are invested in age-based funds, said portfolio manager Christopher Sharpe.

Such funds are re-balanced as the child gets closer to college enrollment.

Typically, the funds are managed so that more aggressive, equity-oriented investments are made early in the life of the fund, while more conservative, fixed-income investments are made as the fund approaches maturity.

Sensitivity to risk, as well as the relative simplicity of the concept — and the ease with which it can be explained to parents — are major reasons for the popularity of age-based funds, according to industry executives.

Inflation-indexed products such as Treasury inflation-protection securities, as well as high-yield instruments and international equity funds, also may become more popular 529 plan investment alternatives over the next few years, according Mr. Friedberg and others at the conference, which was promoted by of Pittsford, N.Y. But they are likely to remain secondary choices.

"At the end of the day, age-based funds will lead the way. They are the appropriate place to be for investors in these plans," said Mr. Sharpe of Fidelity.

"They are the predominant in-vestment option for 529 plans now, and I think they still will be five years from now," Mr. Heywood said.

"They're popular because they're simple to understand," said Richard Westman, director of the Vermont Higher Education Investment Plan in Winooski, where 75% of the assets are in age-based funds.

The fact that most 529 plans allow investors to change their investment choices only once a year also bolsters the popularity of easy-to-understand age-based funds, program managers added.

"It's the most important asset-allocation decision many of these investors will make, and they want to get it right," Mr. Heywood said.

Financial planners and advisers also tend to recommend age-based funds to their clients, industry executives say.

While some advisers genuinely believe in the concept, they said that others choose age-based funds either because they don't want to take the time to construct customized portfolios for their clients or because they are afraid of potential compliance issues if investors complain about their choices.

Advisers who choose an age-based fund "feel their back is covered," because the funds come approved by their company's compliance department, said James Peavy, a certified financial planner and vice president of 529 sales for Kansas City, Mo.-based American Century Investments.

But Susie Bauer, first vice president and 529 manager for Milwaukee-based Robert W. Baird & Co. Inc., said compliance departments also can approve customized 529 portfolios, noting that age-based funds aren't for everyone.

"For example, an age-based fund may be duplicating what an investor already has in a taxable portfolio," she said. "One size doesn't always fit all. There is definitely a place for individual portfolios in 529 plans."

Charles Paikert can be reached at

"AT THE END of the day, age-based funds will lead the way."

Christopher Sharpe

Portfolio manager

Fidelity Investments


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