Your client's child is headed off to school. How well has that 529 done for him the past five years?
If he is using a college savings plan in New York, Pennsylvania or Iowa, his funds get an A. If he has chosen South Dakota or West Virginia, though, he might want to take a year and learn about the wonders of the workforce.
Most 529 college savings plans offer age-based investments for students. As they approach their freshman year, the funds cut back on stocks and increase bonds and cash, much as age-based retirement plans do for pre-retirees.
Morningstar puts the funds aimed at students ages 13 to 18 into three categories: low, medium and high equity. The funds don't always fit neatly into Morningstar's categories: New York's entries in the low equity categories for that age group, for example, include funds aimed at those 11 to 15 and 16 to 18.
A higher equity exposure didn't guarantee better performance, however. The Standard & Poor's 500 stock index has gained 13.38% with dividends reinvested, but the medium equity category edged out the high equity category. Here's how the three categories for those 13 to 18 have fared:
• Low equity: An average 2.5% annual return. The funds kept an average 11.94% of their assets in stocks.
• Medium equity: 4.80% a year, thanks to a 30.53% stake in stocks.
• High equity: 4.78%, with an average 44.36% equity exposure.
In the high equity category, Iowa's direct-sold aggressive growth fund for those 11 to 15 fared best, gaining 8.61% annually with a 79.98% stock exposure. In second place: Iowa's aggressive fund for those 16 to 18, which rose 7.47% a year. The fund had a 60.30% stock allocation. Vanguard runs Iowa's direct-sold program.
The high equity category also had the widest range of outcomes. Those who invested in the C shares of the West Virginia SMART529 fund for those ages 16 to 17 earned an average 1.53% a year. The fund, run by Hartford, had just 27.14% in stocks.
New York's
direct-sold aggressive age-based plan for those 11 to 15 won the moderate equity group, gaining an average 8.06% a year with a 50.59% stock allocation. The fund invests in Vanguard index offerings. Pennsylvania's fund for 11 to 15 year olds was in second place, gaining 7.61% a year, and Iowa's was in third, up 7.47% a year.
On the low end: South Dakota's College Access fund for those 15 to 17, run by Allianz.
The B shares averaged 1.70% a year, and had a 14.17% exposure to stocks.
The only funds showing a loss for the past five years were in the low equity category. Alabama's College Counts fund, geared at those 17 to 20, had no stock exposure and lost an average 0.32% a year for the past five years, according to Morningstar. Wilshire Associates picks the funds for the plan, which is run by Union Bank & Trust. Alabama's offering for 13 to 16 year olds, however, gained an average 3.88% with a 19.93% allocation to stocks.
Performance isn't the only factor in a 529 plan: Tax breaks for residents are a powerful attraction as well. West Virginia, for example, allows parents to deduct the full amount of their contribution from state taxes. And, until last year, West Virginia provided matching grants to eligible West Virginia families up to $500 per designated beneficiary per year, up to a lifetime maximum of $2,500 per designated beneficiary, with a dollar for dollar match.
