Selecting a 529 Plan
With a variety of 529 plans to choose from, selecting the right one or the right combination of plans to meet your family's needs can be daunting. A strategy that works for one family may not be the right fit for another family. It is important to think about what factors are important to you, and to select the options that best fit your needs.
Most states offer an incentive (e.g., tax deduction, tax credit, matching contribution) to residents participating in their home state's plan. Look at your home state's plans first and determine what incentives exist (if any). Take those into consideration when deciding if you'd like to pursue your state's plans vs. another plan.
Once you understand what your home state is offering, you can begin to evaluate its 529 plan, as well as other 529 plans. As a beginning framework to evaluate plans, it is important to decide what is important to you:
- Risk vs. Guarantee?
- Direct Sold/Advisor Sold?
- Investment Options?
- Historic Investment Returns?
Three Types of 529 Plans
529 Savings Plan
If you are the type of person who would prefer to use an investment plan for your college savings needs, then a 529 Savings Plan may be the option for you. Every state sponsors at least one of these plans, and many states sponsor multiple 529 Savings Plans. These are called "savings plans" but they are truly investment accounts that can appreciate in value or can lose principal.
Pre-paid Tuition Plans
If you prefer a "guaranteed" savings plan, then the pre-paid tuition plans may be the option for you to evaluate. Prepaid tuition plans are guaranteed for in-network schools. If the plan is sponsored by a particular state, then its in-network schools typically include the public schools in that state, and may also include the private schools in that state. Most of these state-sponsored prepaid tuition plans require the account owners to be a resident of the state.
In addition to the state-sponsored prepaid plans, there is a prepaid plan that is sponsored by a consortium of private colleges. The Private College 529 Plan is a national prepaid tuition plan that has nearly 300 participating institutions (including the University of Notre Dame), spanning across the United States and representing all sizes, interests and academic rigor. For an overview of the Private College 529 Plan, please visit: Private College 529 Plan.
Direct vs. Advisor Sold 529 Plans
When deciding to invest in a 529 Savings plan, the first decision is to decide if you want to purchase a "direct" plan, meaning that you research, purchase, monitor yourself, or an "advisor" plan, where you enlist the assistance of a financial advisor to research, purchase and monitor the account. There are advantages and disadvantages to each type of plan which must be weighed when making the decision.
There are two main types of investment options for your 529 Savings Plan:
- Static Option - where the investment portfolio is "static" or not programed to change over time
- Age-Based Option - where the asset allocation of the investment portfolio is programed to change over time, typically becoming more conservative as the beneficiary approaches enrollment.
The past performance of an investment fund in relation to the financial markets is a general way to measure the performance of a fund. In addition, there are two different organizations that rate 529 Plans, Savingforcollege.com and Morningstar. Please note that Savingforcollege.com advisor plan rankings and Morningstar's ratings are only offered through their respective premium subscriptions.
Over the course of an investment, fees add-up. When making investment decisions, it is best to review and take each plan's fees into consideration. Please note that there may be several fees for a single investment, such as a fund fee, an advisor fee, and a state enrollment fee. Below is an example that demonstrates the impact of fees. In this example, a family contributes $2,000 annually to a fund which grows at 5% annually. If the fund did not have any fees, after 20 years the family would have approximately $70,000 in the account. If we assume a modest 1.5% fee, the family would only have approximately $60,000 in the account after 20 years. The difference between the two scenarios is approximately $10,000 which is equivalent to 5 years of contributions. Fees do make a difference!
Most states outsource their plan administration and their fund investments to a third-party, such as Vanguard. If you have preferences for a specific investment manager, you may want to take these relationships into consideration when selecting your investment fund.