Comments on: 529 Plans: Age-Based Options Don’t Make Sense

By: TFB

TFB — Fri, 16 Apr 2010 18:55:22 +0000

Steve – It’s not too late, especially if you get a state tax deduction from contributing to a 529 plan. Just make sure you select a safer investment option. For example the Ohio CollegeAdvantage 529 plan I mentioned in this post offers FDIC insured CDs.

By: Steve

Steve — Fri, 16 Apr 2010 13:33:24 +0000

My son is 15 and my daughter is 12, is it too late to open a 529? Or, should we use another option?

By: Jason Reaves

Jason Reaves — Mon, 29 Mar 2010 22:51:38 +0000

Your main point – that the age-based funds are too risky given only a 20 year horizon – may be correct. However, I disagree with some of your reasoning. You suggest that poor stock market performance during the first six years would be mitigated by keeping assets in stocks longer. (You say, “You are much better off keeping 62.5% in stocks until age 11. Then it doesn’t matter if stocks do better in the first six years or the second five years.”) Sounds like the gambler’s fallacy to me. The fact is that stocks could just as easly stagnate or even continue to slide over the ensuing 5 years. The longer you keep assets in stocks, the greater the risk (and expected rate of return). To decrease risk, shift assets from stocks to bonds and/or cash sooner; don’t double down on stocks in hopes of a market turnaround.

By: Zak

Zak — Fri, 29 Jan 2010 00:26:58 +0000

Be somewhat wary of the very lowest fee options available in plans. Often these can be indexed funds, which is just fine, but what you need to make sure of is that they expand beyond just the S&P 500 index into other indexes as well. The reason being that the S&P 500 index is not diversified; it is simply diversified across large cap stocks (which is only one asset class). The Callahan Periodic Table of Market Returns (http://www.callan.com/research/download/?file=periodic/free/360.pdf) will demonstrate that being invested in only one index (such as the S&P 500) will lead you down an unhappy road of extreme volatility.

Also, remember not to jump over dollars for dimes. Low-fee investments don’t do a lick of good unless they actually perform (which usually entails some degree of active management). If you have ticker symbols available, a good way to compare investments is just to go to a website like Google Finance and compare some of the standard metrics (alpha, beta, etc.) There are some higher fee investments that blow less actively-managed investments out of the water based on performance. There are also some higher fee investments that are absolutely garbage if you look at their history. Same thing for low fee investments. A simple alpha/beta analysis will usually help you to look past fees (whether they are high or low) to get an actual understanding of relative performance against similar investments.

By: TFB

TFB — Mon, 11 Jan 2010 16:02:06 +0000

Scott – Lifecycle funds for retirement are fine. They ratchet down more slowly.

By: Scott

Scott — Mon, 11 Jan 2010 15:32:49 +0000

What is your opinion on Lifecycle funds for retirement purposes not college?

Some further information:
I am 34, and my company has negotiated a nice deal with our provider for a taylored made (not open to the public – no ticker symbol) lifecycle 2040 fund with a very low 0.10% expense ratio. I was thinking of contributing to take advantage of this “deal” and wanted to know your opinion.

By: TFB

TFB — Fri, 08 Jan 2010 21:50:40 +0000

GrandArch – Sorry if I wasn’t clear about the 62.5%. I was only referring to the contributions at age 0. At age 9, you wouldn’t put 62.5% in stocks and then sell them off at age 11. I’m with you on varying the allocation for the contributions, not the assets.

By: GrandArch

GrandArch — Fri, 08 Jan 2010 16:34:59 +0000

I’m not sure about TFB’s point of maintaining a 62.5% share in stocks being the solution. You’re saying that contributions prior to any period N when adjustment occurs will only have N – k years, where k is the year a contribution was made. So whether that’s at year 5 or year 10, the effect still occurs, though presumably it’s for a smaller share of the portfolio when the adjustment occurs in year 10.

I’d theorize that it might make sense instead of immediately selling off shares to do a more dynamic change – to change the allocation of contributions instead of the underlying portfolio before this kind of break were to occur. This would allow contributions made in year N-1 to continue growing. I haven’t run the numbers on various scenarios to see if a you could achieve that kind of large change in asset allocation in only a few years, however. Nor am I familiar enough with the dollar cost averaging theory to know if it would be undermined by significantly reducing contributions to stocks. If others have any thoughts…

By: Ted Valentine

Ted Valentine — Wed, 06 Jan 2010 22:08:06 +0000

I use Ohio’s 529 because its low cost and has a low entry level and allows a low contribution amount. I also do not like the age-based options and never had for the same reasons. They don’t make sense.

I use the Wellington fund option. When they get in High School I will start looking at moving chunks over to a money market or CD option.

College is so expensive that it is not within reason for me to pay for all my children on my income. Therefore I will be agressive for >10 years with the hope that there will be significant appreciation of the funds above the rate of college inflation. If that fails, then sorry kid borrow more money and get good grades so you can pay it back.

By: TFB

TFB — Tue, 05 Jan 2010 22:36:49 +0000

Andy – Yes for the first question; no for the second. Other than difference in investment options offered, all 529 plans are alike. You can read more and compare 529 plans at savingforcollege.com.