529 plan wrinkle aims to dampen volatility

OCT 13, 2011
Rhode Island's college savings plan has a new feature aimed at limiting parents' roller coaster ride when the markets face extreme volatility. And observers think the idea may catch on with competitors. AllianceBernstein LP recently added a volatility management component to the age-based and risk-based portfolios available through its Section 529 college savings plan. The firm introduced a similar tool for its retirement savings vehicle last year, which resulted in an extra 30 basis points in returns, according to the company. “This is a new concept for the 529 industry, and it is based on investor preference for lower volatility,” said Paul Curley, a Financial Research Corp. analyst. “I would expect this will broaden out to more plans.” As a whole, 529 plans were criticized for their poor performance in 2008, when their total assets fell 21% to $88.5 billion. At the end of last year, 529 plans held about $138 billion in assets, according to FRC. AllianceBernstein sells the CollegeBoundfund plan directly to Rhode Island residents, but most people buy it through financial advisers. The plan has $7.2 billion in assets with about 500,000 accounts, according to AllianceBernstein, which has been program manager to the plan since 2000. One of its selling points: The volatility component has been tested in other applications, so any kinks likely have been worked out. “The goal is to help limit short-term risk in environments like 2008 and like today,” said AllianceBernstein senior vice president Christopher Nikolich, a senior member of the team responsible for the asset allocation for 529 programs. Parents and grandparents will appreciate the added peace of mind, even if they don't understand the particulars of how it works. During periods when the managers expect high volatility, they will adjust investments in this new “derisking” portfolio to reduce exposure to equities within that component, the firm said. Some advisers would like to see other plans follow suit. “It would be advantageous for all 529 plans to have some type of mechanism that would allow a manager of a plan to reallocate during volatile periods,” said Harvey Meldrum, founder of Meldrum Financial LLC, which manages about $40 million in assets. Of course, there is always a risk when anyone tries to time the market. “If we all had a crystal ball, then we could avoid all client losses,” Mr. Meldrum said. [email protected]

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