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How to choose investments in a 529

Posted by Cheryl Costa  September 6, 2008 10:50 AM

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It seems that I have been fielding a lot of questions lately relating to 529 plans. Today I will talk about how to invest your money once you have selected a specific 529 plan.

Every plan is different, but speaking in very broad terms, most plans offer age-based portfolios, target (or static) portfolios, and the ability to select individual funds.

Age-Based Portfolios

With age based funds, you pick the fund that most closely maps to your childs current age. If you have three kids who are five years apart, each child would probably be invested in a different fund. The portfolio of the oldest child would be invested less aggressively than the middle child who would be invested less aggressively than the youngest child.

Typically, the age "bands" are three to five years. A 15 year old child might have a portfolio containing 40% equities, while a 10 year old child might have 60% equities, and a 5 year old might have 80% equities.

Over time, each age based portfolio automatically changes and becomes more conservative. This is the option to choose if you want to invest your money on "autopilot" and not have to be revisting your investment choices.

Target or Static Portfolios

Alternatively, target or static portfolios have a constant allocation. The 100 percent equity fund, for example, would always be 100 percent invested in equities. The 20 percent equity fund would always have a 20 percent equity exposure. Oftentimes these funds are simply labeled "Aggressive", "Moderate", or "Conservative".

These portfolios do not change based on the age of the beneficiary. If you think a portfolio with a 60 percent allocation to equities is "about right" for now and the forseeable future, and you don't want your portfolio to get very conservative as your child approaches college age, these portfolios may be for you.

Lots of people select the 100 percent equity portfolio for a young baby and leave it that way for 10 years or more. When the child approaches the teen years, the parents may switch to a more moderate portfolio. These portfolios are often used by people who want a little bit more control over the investments.

Individual Funds

Finally, many plans offer the ability to pick individual mutual funds and the big attraction here is that you can allocate your money across the different funds however you want. This is my favorite option and it is popular among the "I must have total control" crowd. Usually, there are 15 to 20 fund possibilities and you can tailor the portfolio to include exactly what you want. Depending on which funds are selected, these portfolios may be more volatile than the typically more broadly diversified age based portfolios and target portfolios.

In summary, I encourage you to read the enrollment handbook for any plan that you are considering. Most are very easy to read -- not at all like a mutual fund prospectus. After reading the handbook, you should have a pretty good idea of how you want to invest. And, don't forget that you are free to change your mind. The owner of the account can change the allocations once per calendar year or upon a beneficiary change.

This blog is not written or edited by Boston.com or the Boston Globe.
The author is solely responsible for the content.

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