529 College Savings Plan Asset Allocation – Should you Change?

Many 529 college savings plan investors have watched their children’s college savings collapse along with the stock market over the last six months. Even those who invested in the age-based models – which dial back on the risk exposure every few years - were surprised by the volatility of their returns, especially if their children were nearing or enrolled in college. Performance was dependant on the plan chosen. The Utah Educational Savings Plan outperformed most of its peers, while Rhode Island’s CollegeBoundFund greatly underperformed.

(For this newsletter, we are using as examples the two most popular plans for our clients: the Utah Educational Savings Plan and the CollegeBoundFund).

Those who sought to change their portfolio model ran into another potential problem. Until very recently, the IRS forbade more than one portfolio model change in a calendar year, blocking a move to a more moderate investment model if a change had already been made earlier in the year.

Good news: the IRS has since had misgivings about its stringent rules. For 2009 alone, the agency has agreed to two annual investment changes. This allows the 529 plan participant (owner) to dial back on risk exposure now and reverse course later in the year, should the markets begin to recover.

Choices
For example, assume that your 12 year old child is enrolled in the moderate age based portfolio at the Utah Educational Savings Plan. In this model, your child holds 50% in the stock market and 50% in the bond market – not a bad place to be under normal market positions. But 2009 isn’t a normal year and perhaps you feel uncertain about stock market returns over the next six to nine months. So you move to Option 9 – the Conservative Age Based Portfolio. The 12 year old under this model only has 20% of the portfolio assets exposed to the stock market. Come October or November, if you feel more comfortable with market conditions, you can move back to the Moderate Portfolio without having to wait until 2010.

Two annual portfolio changes work even better for the CollegeBoundFund. For the same twelve year old, your exposure in the Age Based Growth Portfolio – the most conservative age based model - is 65% stocks. Should you desire less equity exposure, your best bet is to move to the Preservation Portfolio with 35% stocks and the balance invested in fixed income and cash. Later this year or early in 2010, you can always move back to your original allocation.

General Treasurer Frank Caprio, who appeared on the February 14^th Making Money Show, has promised a careful review of the CollegeBoundFund investment allocations, including possible additions of more conservative age based portfolios.

Pre-Enrollees
If you have a child about to enter - or currently enrolled in - college, you are best off carefully reviewing your current allocation to stocks. This is especially true for the CollegeBoundFund, which lost over 20% in 2008 for its college enrollees.*

Our Recommendations:

Utah Educational Savings Plan: Option 9 – all bonds and cash for this age group - works well for the pre-college student. Once your child enters college, call UESP to let them know; enrollees are placed in Option 11 - the FDIC-Insured Savings account.

CollegeBoundFund: If your child is headed to college or currently enrolled, move to the Principal-Protection Income Model, which invests in a diversified portfolio of fixed income and money market instruments.

The lesson learned for 529 plans last year is that not all plans are created equal when it comes to investment performance. Although 529 plans do not require much oversight on your part, occasionally checking your portfolio model is a good idea.

StrategicPoint Working with You
If you have any questions on your child’s or grandchild’s 529 Plan asset allocation, please feel free to call us.

StrategicPoint Investment Advisors, LLC

*Figure provided by Savingforcollege, January 21, 2009.

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