529 plans are the best vehicle to save for college. But which 529? Nationwide, there are hundreds. In Virginia there are two: VEST (Virginia Education Savings Trust) and CollegeAmerica. There are several questions to address before the investor can make a wise choice.
You can invest in any state’s 529 plan and money from any state’s plan can be used to fund any eligible college in any state. This was intended to allow state plans to compete with each other and to give investors the choice of selecting the best plan.
When states started setting up 529 plans, mutual fund companies clamored to have their funds used by the plans. One fund company was selected by one state and another company was selected by another state.
But mutual fund companies don’t like to send business to their competition. If you seek advice by a representative who makes money by selling one company’s mutual funds, they are probably not going to recommend a state plan using another company’s funds.
Virginia set up two college savings plans, both of which get a state tax deduction for contributions. VEST, a government operation, was first offered to the public in January 2002. CollegeAmerica is a subsidiary of The American Funds, a privately-run company which opened its 529 plan to investors in February 2002. VEST can be purchased only through the Commonwealth of Virginia. Visit www.virginia529.com for more information. CollegeAmerica can be purchased through fee-only advisors or commissioned advisors.
We prefer the CollegeAmerica plan. So does SavingForCollege.com, an excellent source of information on 529 plans. You can view their ranking of 529 plans at www.savingforcollege.com/5_cap_ratings .
The need. Currently only 8% of American families with children under eighteen are saving and investing in 529 college savings plans. The other 92% represent a big need. The 529 plans meet several needs by offering cash poor families a systematic savings plan starting at $50 a month, helping middle class families retain control of their assets, and creating multiple tax benefits for the wealthier investors.
The benefits. Tax deductions. Tax-deferred growth. Tax-free withdrawals. Account control remains with the account owner, who can change beneficiaries. Automatic investments of as little as $50 per month. Contribution limit (including earnings) of $250,000 per student. The specifics of each should be reviewed for applicability with your financial advisor.
Load or No-load. If you decide to purchase your 529 with CollegeAmerica, you can choose to work with a commissioned advisor or fee-only financial planner. The commissioned brokers will give you 3 loaded alternatives: A, B, and C class shares. A class share commissions are paid to the broker when you buy in, after which the broker is paid a trailer 12b-1 annual fee. B class share commissions are paid to the broker when you sell out and also pay the broker a trailer 12b-1 annual fee. C class shares don’t pay a commission to the broker in the beginning or in the end, but pay the largest 12b-1 fee, every year. The fee-only advisor services the same family of mutual funds, but represents F class shares, the no-load no-commission alternative.
Minimize plan fees. Watch out for portfolio maintenance fees. The state may add administrative fees. Some states are better than others, and sometimes the information is difficult to determine.
Minimize fund fees. CollegeAmerica offers 21 different fund choices. Each fund has a different expense ratio. So computing the expense ratio on your specific asset allocation mix requires a calculator. The bond fund might have a lower expense ratios and the small cap or emerging market funds will have higher expense ratios.
Fees should be reasonable so that they won’t drag performance, but the lowest cost isn’t always the best choice. We use fees as a criterion to narrow our choices, not as an absolute.
Asset allocation planning. Many 529 plans offer a limited selection of asset allocation mixes. Others offer an age appropriate portfolio that automatically grows more conservative as your child gets older, usually changing once every 3-5 years. We prefer to have more control over our accounts.
A few 529 plans, such as CollegeAmerica, allow you to select your own asset allocation mix from their selection of fund choices. If your child is young, the portfolio can emphasize appreciation. As college approaches, your investments can be reallocated more toward safety of principle.
No manager can accommodate the unique needs of each child with cookie-cutter allocation models. For wealthier clients, the asset allocation can be more aggressive because they have other resources to pay for college. We recommend a higher percentage of foreign investments than most fixed asset allocation plans currently contain.
Fund quality standards. Finally, no amount of investment savvy can compensate for poor fund management. Know the underlying funds in your portfolio. This will help you to assess the quality of your portfolio management. We have specific fiduciary criteria that we use to evaluate funds. We favor funds with low turnover, low volatility, little style drift, good management and good diversity.
Getting started. If you are one of the 92% with children under the age of 18 who haven’t started a 529 plan, we encourage you to meet with a fee-only financial advisor soon. You can never start too early, and it’s never too late to do something.
- College Savings Part 1 – A College Degree is Worth a Million Bucks
- College Savings Part 2 – Start College Savings the Day They Are Born
- College Savings Part 3 – Joshua and the Wall of College Savings
- College Savings Part 4 – 529 Plans: What’s Important?
- College Savings Part 5 – Prepaid Tuition Programs May Be Fool’s Gold
- College Savings Part 6 – Tackling college costs at the eleventh hour