Certain nuances of Section 529 college savings plans should be considered when looking for an investment plan that will grow enough to pay for the increasing costs of college.
Advisers should begin with an analysis of the cost of the plan, including all the fees that cover program administration as well as the fees on the underlying investments, Massi De Santis, senior research associate for Dimensional Fund Advisors, said at the annual College Savings Foundation conference Wednesday in Austin, Texas.
Fortunately, the nation's 529 savings plans
have mostly lowered fees over the past decade.
Plans also should offer diverse investments with appropriate options based on investors' risk preferences, he said.
That doesn't mean looking for a plan with the greatest number of options.
“You want a mix of asset classes, but the benefits of adding more options diminishes at some point,” Mr. De Santis said.
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Experts recommend considering investment performance when evaluating plans, even though the historical data cannot predict future outcomes, as well as whether plans use active or passive management.
Active management will be more expensive, so performance should show that such an investment style is paying off, said Paul Curley, Strategic Insight's director of college plan research.
Another feature to look for among the nation's 529 plans, which house about $248 billion according to the College Savings Plans Network, is automatic reallocation.
This ensures that the weighting of investments within allocations are staying in line with the investment philosophies laid out by the managers, Mr. Curley said.
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Such a feature is especially important with a 529 plan because federal rules only allow investors to make portfolio changes twice a year, he said.
Finally, examine how plans hedge against inflation.
Treasury Inflation-Protected Securities are included in 290 investment options within the nation's 529 plans, but increasingly, TIPS-based investments are showing up as individual options, said Andrea Feirstein, managing director of AKF Consulting Group.
