About the authors: For over 25 years, Cynthia S. Meyers, CFP®, MBA, has assisted people with their Lifetime Financial Planning–helping to build and preserve wealth in every area of life. Jenny Hood, CFP® has been a paraplanner with Cynthia S. Meyers for five years and enjoys being a part of the financial planning process. They offer their expertise for families working to save for college:
The last blog addressed overcoming the challenge of learning how you can save for college. The next challenge, we’ll discuss, will be knowing how to compare and choose a 529 plan that is right for you and your child.
As stated in the last blog, each state has its own plan(s); however, you do not need to be a resident of that state nor does your child need to attend a college within that state to contribute to its 529 plan. Some states offer a tax deduction for residents contributing to their plan, but California is not one of those states. Therefore, if you are a Californian, you want to base your decision on a plan that has a balanced variety of investment options as well as low expense fees. Here is the challenge: What type of investment options should you seek? What is considered to be a low expense fee?
There are many websites that compare 529 plans, but our experience has been that they are cumbersome and it is frustrating trying to choose which features to compare (i.e. fees, investment options, eligibility requirements, minimum contributions, etc.). After you select a few features to compare, you are presented with an overwhelming list of state plans. You may feel more confused than when you started.
So here are some guidelines for finding a good 529 plan:
- Look for plans that offer equity (stock) funds, bond funds, and some stable value funds (e.g. money markets, CDs, GICs). These plans will allow you to create a more customizable approach, based on your family’s needs, to saving for college. For example, when your child is younger, there is more time before you will need the money for college; therefore, you can be a little more aggressive, with more invested in equity than bond or stable value funds. As your child ages, you have less time before college, and therefore, you would want the flexibility to move towards a more conservative portfolio, with perhaps a greater investment concentration in stable value funds and short-term bond funds, rather than equity funds.
Some plans offer aged-based portfolios, which change the investment mix automatically as your child ages. However, this approach does not always work in real life circumstances. For example, if your child wants to go to a community college first or you decide to use the 529 for graduate school, owning a portfolio that automatically adjusts the investment mix according to the child’s age might not be ideal. Also, using the same age-based investments does not allow you to choose the funds specific to your own risk level or investment policy. Therefore, while age-based portfolios may work for some, they should not be seen as a one-size-fits-all solution.
- Regarding expenses, there are many fees to be aware of: an enrollment or application fee, account maintenance fees, program management fees, and the underlying investment fees. If the plan charges annually to maintain the account, it should be minimal, no more than $10. Most of the program management fees range from 0%-0.75% and include the state’s administrative fee. The underlying investment fees can differ based on the share class that you purchase; however, a good range is 0.10% – 2.0%.
In our third installment, we discuss the challenge of knowing how much to save in your child’s 529.