Maneuver the Maze of 529 Savings Plans

Physician's Money Digest, May 15 2003, Volume 10, Issue 9

Overall, Section 529 college savings plansare structured in a similar manner, buteach plan has several key variables thatcan determine if a particular state's plan is appropriatefor your individual situation. Many of thevariables listed below can be of more or less significanceto each individual when decidingon the proper plan to use. The key tounderstanding these variables is to prioritizethem for your situation and thenuse this criterion to select the best plan.


When sorting through the variousoptions offered by states' 529 plans, besure to make the following considerationsbefore deciding:

1. Do your homework. Educateyourself on the basics of the 529 plan.Have an understanding of the rules.

2. Know your investment options.Most plans offer some form of anage-based or years-to-enrollment investmentprogram that starts out as aggressiveand automatically becomes moreconservative as your child becomes closerto eligibility for college enrollment.Another option offered usually includes a guaranteedor fixed-rate investment strategy. Dependingon the particular plan, there are also other optionsavailable that allow you to choose a specific or combinationof investment strategies.

3. Compare costs. Included in this considerationwould be enrollment fees, annual maintenancefees, asset-based fees, administration fees,underlying fund expenses, account minimums,sales charges, and penalty payments. Each planwill differ when it comes to expenses, so payclose attention to the fine details because a planloaded with expenses can decrease the effectivenessof the plan's investment returns.

4. Investigate a plan's flexibility. This dealswith the administration side of the plan. Look foranswers to the following questions:

  • Is the plan offered to nonresidents?
  • Are there restrictions on transferring theaccount to another beneficiary?
  • Are there any age restrictions?
  • What are the account minimumand maximum contribution limits?
  • How often can you change yourinvestment strategy?
  • Is your account guaranteed orbacked by the state?
  • Is there a minimum period beforequalified withdrawals may be taken?
  • What are the enrollment and purchaseprocedures?
  • Does the plan offer online accessfor plan documents, account application,or account access?

Some of the largernames:

5. Choose among plan managers.Many states contract the investmentmanagement and some or all of theadministration of the plan to professionalmoney managers or mutual fundcompanies. For the most part, theseinvestment professionals are widely recognizedand highly respected. TIAA/CREF, Vanguard, State Street,American Century, Fidelity, Janus,T. Rowe Price,PIMCO, Strong Capital, Van Kampen, SalomonSmith Barney, Putnam, Morgan Stanley, MerrillLynch, Oppenheimer, and Mercury Funds. As youcan see, there is quite a selection to choose from, soselect a plan you feel the most comfortable with.

6. Weigh the special incentives. Does yourstate's plan offer tax deduction for contributions?Are qualified withdrawals from your 529 planexempt from income tax in this state? Are qualified withdrawals from other states' 529 plansexempt from income tax in this state?


7. Evaluate investment performance.Because of their relative newness, most 529 plansonly have a year or less of overall investment performance.However, many of the plan's underlyingsecurities are established investment vehicles thathave many years of historical returns, so an estimatedperformance analysis is possible. Past performance is no guarantee of future results.


In the current market environment, it'simportant to consider the time frame before yourfunds will be needed. If your child is 1 to 3 yearsaway from college, then perhaps a more conservativeinvestment strategy is prudent. If the timeframe for your child's college enrollment isgreater than 5 years, a more aggressive allocationwould probably be appropriate. The age-based oryears-to-enrollment investment option allows theplan to automatically change the allocation ofthe funds to coincide with your child's age so younever have to worry about reallocating.

The downside to this is that the investmentmanager's idea of an aggressive or conservativeallocation does not always correspond with theinvestor's philosophy. This is where the "static"options come into play. The static alternativeallows you to invest in 1 particular direction.Each state usually offers several different strategies,so you must consider your individual situationbefore you decide on this method. Bewarethat a change to your investment direction isavailable once per calendar year, so market gyrationscould seriously affect your portfolio.

Understanding your situation as it applies tosome of the key variables above is one of the bestways to make a decision on the most appropriate529 plan for your child's education. I would alsorecommend that you seek the advice of a financialprofessional in your area before making any decisionson which plan is best for you.

William B. Howard, Jr,is president of William Howard and Company, a fee-only investmentfirm in Memphis,Tenn. He has 21 years of experienceworking with physicians and was named one of the top150 advisors for doctors by Medical Economics.He welcomes questions or comments fromreaders at 901-761-5068 or