For those of you that don’t know, a 529 account is a tax-advantaged education funding account. It is a fantastic option for parents looking to invest and save for college. Money goes in post-tax and if used for qualified higher education expenses, comes out tax-free. It is like an education version of a Roth IRA. More recently, a 529 plan can be used for K-12 too.
Each state has its own 529 program. This means each state hires its own money manager and has its own investments, portfolios, glide paths and fees. Having so many choices are a blessing and a curse. It gives parents a wide array of choices, but the choices can be overwhelming, especially when families have so many other financial tasks in their busy lives.
There are three main types of 529 Investors:
- The Customizer
- Keep-It-Simpler (KISSer)
- The Inbetweener
Like many 529 plans, Utah has a great lineup of low-cost Vanguard funds. What sets Utah apart is its access to not only Vanguard funds but DFA funds too. Utah also has the ability to customize static and age-based portfolios. Age-based portfolios are designed to decrease risk as you approach a date, in this case college. With Utah, you are able to allocate dollars to different funds within different age bands. Utah makes very clear what the fees will be from the start:
This means you can not only manage your portfolio holistically, but you can also have the individualized risk of a customized age-based 529 plan decrease as the child gets closer to college. As a portfolio manager, this tailoring produces far superior risk-return profiles than a one-size-fits-all approach.
But if you are one of those busy Minnesota parents dropping off kids at soccer, boating on our lakes, or catching one of the Twins’ winning streaks, you might want to KISS it. And no one does it better than Minnesota with Keeping It Simple Stupid (earmuffs). Minnesota’s 529 plan has limited but effective options using low-cost TIAA Cref funds. They do a nice job of mixing in more asset classes than many 529 plans in their age-based glidepath. Their glidepath is a good one-size-fits-all for the set-it-and-forget-it parents.
They also make things very easy for account opening and customer service. Many clients have found the local presence a plus too, even in this virtual age. Minnesota’s 529 plan, MN Saves, also makes it easy to find information about fees and underlying investments.
Many parents also find they lie somewhere in between the Customizer and the One-size-fits-all parents. This is where New York’s 529 plan might be a good fit. It doesn’t have quite the customization features of Utah, but it has more risk-return tailoring than Minnesota. They accomplish this by allowing different risk level client paths. Whereas many 529 plans only have one age-based glidepath, New York has 3: Conservative, Moderate, and Aggressive. Aggressive starts at 100% risky assets at age 0, declining to 12.5% at age 19. Moderate starts at 87.5% risky assets at age 0, declining to 0% by age 17. The Conservative glide paths starts 62.5% risky assets and declines to 0% by age 13.
Regardless of which Minnesota Nice college investor you are, make sure you are aware of the risk and return potential. College funding is hard. The time horizon is short and college inflation, aggressive.
Lastly, as you research 529 plans, you will notice it is difficult to get information from many states regarding fees and investments. It’s like they have something to hide – as the Dragon Queen pretended she wasn’t a crazy killer for 7+ seasons. If you have to struggle to find relevant information, it is not a great sign. In the case of 529 plans, information like fees, ticker symbols, performance, and the Program Description should be easily available.
With college costs increasing 2-3x normal inflation and wages, planning for college is more important than ever. The conversation planning should start early and often, and should include your student! You don’t want your student to get the degree but be the “queen of ashes” due to student loan debt.