Faith in Section 529 plans had waned in recent years as investors felt the pinch of the 2008 stock market decline. But now these tax-favored college savings vehicles are picking up steam again. Not only have investors regained confidence, but there have also been several positive changes to the state-sponsored accounts. According to Savingforcollege.com, a leading independent resource for information about 529s, four significant trends have emerged.
1. Fees and expenses have come down. Increased competition among rival plans has resulted in lower fees for participants. Savingforcollege.com’s semi-annual “529 Fee Study” shows the total 10-year cost of a $10,000 investment in plans’ least expensive options dropping from an average of $862 in August 2007 to $570 in August 2011. Those figures include underlying mutual fund expenses in addition to fees for program managers and account maintenance.
“Fees and expenses started dropping back in 2003, but it has only been since 2007, when OppenheimerFunds took over in Illinois, that we’ve seen a real ‘race to the bottom’ among the larger 529 plans,” says Joe Hurley, founder of Savingforcollege.com. “Some in the 529 industry are saying fees in the lowest-cost plans have gone about as low as they can possibly go, and I tend to agree with that. Fees are likely to drop still further now only if states begin subsidizing program operations.”
2. Risk management has become a priority. In the aftermath of the stock market downturn in 2008, the investment managers of many state plans sought to add new investment options—including bank certificates of deposit (CDs) and savings accounts—that provide greater security to investors. Managers are also tweaking age-based investment options so that they’ll hold up better in future stock market declines.
“Before 2008, FDIC-insured bank products were available through only five states: Arizona, Hawaii, Montana, Ohio, and Virginia,” says Hurley. Now 16 states offer them (though Hawaii has dropped the FDIC-insured option in its 529 plan). Moreover, many 529s now let participants choose from among than one age-based investment option—letting extremely conservative investors, for example, select a track that shifts completely out of the stock market by the time a student graduates from high school, while more aggressive investors might choose to keep some money in stocks throughout the college years.
And a few states have gone still further. Rhode Island recently announced a new feature that adjusts for stock market volatility in the age-based investment option of its CollegeBoundfund plan by giving investment managers from AllianceBernstein limited discretion to reduce the allocation to stocks when market conditions become turbulent. In another variation, Utah now allows plan participants to create their own customized age-based tracks.
3. More plans are offering index funds. Mutual funds that passively track market benchmarks have been showing up in more and more Section 529 plans during recent years, largely because index funds tend to have lower expenses than funds that are actively managed. Most states use Vanguard index funds in plans they sell directly to investors, but other companies—including Fidelity, TIAA-CREF, and T. Rowe Price—are also finding their way onto lists of 529 options. And though advisor-sold 529 plans generally still use actively managed funds in their portfolios, one exception is Arkansas’s iShares 529 Plan, which features an assortment of index-tracking exchange-traded funds (ETFs).
4. Multi-manager investment portfolios are becoming more common. Some states that use actively managed funds in their 529 plans have switched from placing investments with a single manager to employing multiple managers. Being able to choose from among several investment managers may help investors further diversify their investments and could lead to higher returns.
Fidelity recently added a multi-manager, age-based option in four states in which it manages 529 plans, TIAA-CREF is now using a multi-manager platform in Connecticut and Oregon—and plans to offer it in California—while OppenheimerFunds-managed plans in New Mexico and Texas have switched to multi-manager platforms. About half of the 529 plans sold by advisors are now multi-manager plans.
All of these changes have come in response to investor concerns about the safety and growth potential of Section 529 plans. Now, plan participants tend to have more investment choices and better options for protecting the value of their accounts.