Sunday Musings: The 529 Problem

Ulli Uncategorized 5 Comments

Several clients of mine have been involved with 529 college savings plans. The love affair with these instruments came to an end last year when many realized the severe limitations of getting out of invested positions within the plan guide lines.

Reader Chris summed it up this way:

What would you do about funds in a 529? I feel helpless since you can only change the allocation once a year!

Let me first say that I am not expert on these plans. However, ever since they were introduced, my view has been negative. Not because of what the plans were meant to accomplish, but because of the limitations on the investment side. To be able to only change an allocation once a year is totally unacceptable to me.

While this worked fine during bull markets, last year’s market crash provided a reality check for those invested in 529 plans. Some of my clients simply opted out, paid whatever taxes were due, and transferred the proceeds to a custodial account.

Saving taxes to provide funds for college is a wonderful thing, but not if it comes at the expense of making wise investment decisions. If you have been involved with such a 529 plan, I like to hear your experiences so other readers can benefit as well.

Comments 5

  1. The law changed recently – you can now reallocate twice yearly, or , as your broker will claim, 'he wants to help you' by 'making' this change.

    The problem is as much one of poor investment options as it is one of frequency of change. Most of the options seem to be the sponsors own mutual funds. I am not aware of any plan that lets you select individual securities, but would love to learn otherwise.

  2. THANK YOU ULLI! thank you for taking this subject up.

    Your comments here are very much appreciated and provide much food for thought! I don't have the final say on these (the parents do…I'm the grandma) but I'll certainly pass this on to them.

    /Chris

  3. Actually it reads like this:
    "10. What if I want to change my investment mix?
    The Internal Revenue Service (IRS) allows you to change your current investment mix once each calendar year or if the Beneficiary of your savings Account changes. However, for 2009 the Internal Revenue Service (IRS) has issued a notice establishing a special rule which allows Participants to reallocate assets in 529 Program accounts twice in 2009. This special rule is only for calendar year 2009 and is not a permanent change. It will allow Participants to adjust their asset allocations in response to turmoil in the stock market. You may change how your future Contributions will be invested at any time."

  4. I went into some CD's on the plans I manage. From 6 months to 2 years and hold most in money markets and TIP fund. Depends on age but only in equities for 8-10-15 year olds.

  5. In 2000, I initially setup the funds for my childrens' education with 50% going into a 529 plan (age based plan, which is mostly invested in stock funds) and 50% going into a taxable account at a major brokerage (again, mostly in stock funds). This did not do well during the 2000 cyclical bear market (draw-down more than 30%), but worked OK during the 2003 cyclical bull. In 2006 I started to learn more about asset allocation and trend tracking, and changed the 529 allocations to a more conservative 25% stock index funds, 75% bond index fund, and used the brokerage account for trend tracking (shifting between stock ETFs and money market). So although the 529 still took a hit in the recent crash, the complete portfolio draw-down (~10%) was still tolerable.

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