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NEW YORK (Reuters) ? Dan Shea and his wife, Jennifer, aren?t conservative investors ? except when it comes to college savings. The Los Angeles couple?s daughter, April, is 13 and eyeing the Ivy League.
?Talk of Yale started at age 6, and I opened a 529,? says Dan Shea, referring to the state-sponsored college-saving plans. ?Even then we stuck to bonds, the sleepiest investment.?
But after 2010 brought turbulence to the normally dull bond market, the Sheas transferred their funds into a still-safer 529 vehicle last May: a certificate of deposit (CD). ?We only have five years to go,? Shea says. ?We want to know our money is secure.?
529s have long been popular with parents and grandparents because their funds can be withdrawn free of federal taxes, and most state taxes, to cover qualified higher education expenses. There is no doubt, though, that volatile markets have yielded mixed results for the plans since 2008.
To encourage families to continue saving, many states have added bank products such as FDIC-insured savings accounts or CDs to their 529 line-up in recent years. The number of these more risk-adverse investment vehicles has nearly tripled, and they are now available in at least a dozen state 529 plans.
?Proof of demand is in how many states now offer these options,? said Andrea Fierstein of AKF Consulting, which advises 529 plans. ?You may forgo some earnings opportunity, but you know your money will be there when you need it.?
TAMPING DOWN RISK
Assets of 529s have mirrored the ups and downs over the last four years of the equities and mutual funds in which they are most commonly invested. Almost across the board, plans? performance suffered in 2008 and 2009, amounting to significant losses in some cases.
Texas, Oregon and Maine are just a few of the states with double-digit drops in value due to their investments with Oppenheimer Fund?s Core Bond fund, which lost 35 percent of its value in 2008, according to Morningstar.
?One family told me they?d have made more money keeping their money under their mattress than in a 529,? said Deborah Fox, a San Diego-based financial planner and founder of Fox College Funding.
Choosing to place funds in 529 plans tied to, say, a high-yield savings account instead of stocks removes the risk of losing money. Investors can rest easy that their money is federally insured up to $250,000, and these accounts are generally no-fee. Nevada, North Carolina, Virginia, Wisconsin and Montana are just some of the states that have added these options in recent years.
?These are the perfect answer for parents with a child approaching college or those who have short-term liquidity needs,? Fierstein says. They are also good for parents hoping to take advantage of tax benefits before the year?s end but who are not yet sure exactly where they want to put their funds.
PREPARE FOR LOW RETURNS
When investors open a 529 plan, it always makes sense to shop around for the best rates of return. A 529 can be opened in any state, but most states offer additional tax deductions or benefits to residents who invest in the home-state plan.
Rates on 529 savings accounts or CDs are generally higher than those offered at your local bank, and the tax advantages add even more earnings potential. Ohio CollegeAdvantage?s CD option, offered through Fifth Third Bank, currently has an interest rate of 1.75 percent for a standard five-to-seven year annual percentage yield.
?I think you?d find our rates are very competitive compared to a regular savings account,? says Richard Norman, interim executive director of Ohio?s plans, which include both the CD option and a savings account as well.
On the other hand, the price of college rose 5.6 percent in 2011, according to the College Board. But despite their lackluster performance in the recent economic downturn, returns on 529s invested in equities or bonds have historically fared pretty well.
?Over the long-term, 529?s age-based models (which include a mix of securities) have performed better than SP funds,? says Paul Curley, director of college-savings research at Financial Research Corp, a division of Strategic Insight. ?They?ve performed better than a lot of other investment options.?
Withdrawing funds from a CD before its maturity date also can carry penalties. CD maturities range from 3 months to 20 years and often require a minimum balance of $500. ?We found CDs were just not flexible enough for our customers, especially those who were middle- or low-income,? said Lynne Ward, director of the Utah Educational Savings Plan, which offers a savings plan instead of CDs.
OTHER MEANS TO AVOID RISK
Even those 529 plans that did not launch new bank-product options have not been deaf to investors? concerns about risk.
Last October, AllianceBernstein introduced new management tools in its college-savings fund to reduce investors? exposure to short-term volatility while simultaneously, it says, preserving long-term returns. Equity markets are closely monitored, and if they dip, funds can be moved quickly into bonds or cash. Currency exposures can also be hedged when appropriate.
More often, however, plans adjusted their portfolio distributions to respond to criticism that age-based models continued to be too aggressive even as students approached college. Several plans ? including Utah?s and West Virginia?s ? now let investors customize their own portfolios, as many 401Ks do.
Fox advises parents who want to minimize volatility to avoid putting lump-sum investments into 529s. ?If you happen to contribute a lot at one time when the market is high, returns will be disappointing,? she says. ?Parents who spread out funds over quarters or even monthly are apt to buy shares at various prices and can take advantage of some lower prices.?
MORE CONSERVATIVE OPTIONS
Fidelity rolled out a bank-deposit program in 2010. But it has always offered other conservative options, such as those tied to money market, short-term and other fixed-income investments, in the plans it administers in New Hampshire, Delaware, Massachusetts and Arizona. These can often be an even better option for risk-averse parents, or at least part of a mix of investments.
?For most families, bank (options) shouldn?t be their sole way of investing for college,? says Keith Bernhardt, vice-president of college planning for Fidelity. ?With rates so low, they?re not taking advantage of the tax benefits that way.?
As for the Sheas, they made only about $400 in interest on their daughter April?s 529 CD so far ? much less than the $2,000 or so per year they once made in bonds. Dan Shea says he recognizes there is a trade-off. ?But if it means we have the money to pay for any college April wants, to me the peace of mind is far more valuable.?
(Editing by Jilian Mincer, Beth Pinsker Gladstone and Dan Grebler)
Article source: http://www.reuters.com/article/2012/01/31/us-personalfinance-college-idUSTRE80U1QX20120131
Source: http://paydayloans-uk.org/personal-finance-removing-risk-from-529-college-savings-plans/
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