Hoping to stave off concern from college savers that 529 accounts are too vulnerable to stock market volatility and expected interest rate hikes, some plan managers are switching up the investment choices available to advisers and investors.
Most notably, OFI Private Investments added five more individual fund options for creating customized portfolios within its adviser-sold 529 plan in New Mexico.
Both the adviser-sold and direct-sold plans in the state also now have a 100% fixed-income option and 100% short-duration bond option, which are designed for a degree of asset preservation in case of rate increases. Both plans also have two more age-based glide paths that are more conservative than previous options.
The the new investment options became available Aug. 31 in the plans, which together have about $9 billion in college savings assets.
“Even though the 529 industry continues to grow, it's nowhere near as large as what we thought it would be,” said Steve Dombrower, director of College Savings Plans at OFI Private Investments, a subsidiary of Oppenheimer Funds. “Part of the reason is there's still a lot of trepidation with investing in general because of 2008 and people are just more nervous when they see volatility.”
Nationally about $258 billion is invested in 529 plans, according to College Savings Plans Network data released on Tuesday. The tax-advantaged education savings accounts gained their name through the
Internal Revenue Service code that created them in 1996.
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In trying to appeal to more investors, the changes will allow someone with a child who is 5 years old or younger to elect an age-based portfolio that doesn't invest 100% in equities, Mr. Dombrower said.
Age-based glide paths adjust asset allocation to become more conservative as the student gets closer to college age.
“My son is 17 and he's still about 70% in equities,” he said. “But with recent volatility fresh on people's minds we put ourselves in the position of all investors and realized 100% equities for those age 0 to 5 isn't for everyone.”
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A recent study of age-based portfolio options among the nation's 529 savings plans by
Savingforcollege.com showed great variations in approach. While some plans invest “very conservatively” for those who are in or close to college, other programs keep significant stock investments and longer-term bonds.
Investors in 529 plans “should be aware of the investment approach used by their investment managers and make sure they are comfortable with the levels of risk in their age-based portfolios,” said Joe Hurley, founder of Savingforcollege.com.
Mr. Dombrower said he expects that advisers, as well as retail investors, will be looking for more fixed-income investment options because “an adviser needs to cater to his client's risk tolerance.”
In Vermont, the state's 529 plan administrators awarded its new 529 program management contract to Intuition College Savings Solutions, the Vermont Student Assistance Corp. announced last month.
Scott Giles, the chief executive of VSAC, cited greater investment range as a top reason for moving the plan, which had been managed by TIAA-CREF Tuition Financing Inc.
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The 529 program's new investment lineup, which includes funds from multiple providers, not just TIAA-CREF, adds a Treasury Obligations Portfolio that's invested in a money market mutual fund that invests primarily in short-term U.S. Treasury Securities.
“One thing we expect 529 plans to consider in light of an expected increase in interest rates are short- term options, such as short-duration bond funds, bank loans and even high-yield bonds,” said Andrea Feirstein, president of AKF Consulting.
Many of the nation's college savings plans already have thought a little about protecting against interest volatility and have made investment shifts, she said.
There has been “a lot of talk about adding liquid alternatives” to potentially offset volatility in the markets, but “there's been a lot more talk than action,” as 529 programs have not moved to include such investment options in their lineups, Ms. Feirstein said.
