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529 College Savings Plans Beat Benchmarks on After-Tax Basis

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Managers of state-sponsored 529 college savings plans appear to be doing a good job investing assets for plan participants, a new study finds. compared the historical investment performance of 529 plans with broad market indexes.

In most categories examined in the study, the average 529 plan returns trailed the comparable index returns.

However, the gap between average 529 plan returns and index returns was slight in many categories, and the analysis showed that 529 plans beat the indexes when results were adjusted for the federal income-tax benefits of 529 plans.

Researchers compared investment performance over one-, three-, five- and 10-year periods ending Dec. 31 in each of seven different asset-allocation categories — 100%, 80%, 60%, 40% and 20% equity; 100% fixed income; and 100% short term.

They used the median 529 performance in each category to represent the average, examining as many as 222 separate portfolios per category.

The broad market benchmarks employed for comparison comprised the Russell 3000 Index, the MSCI EAFE Index, Barclays Capital U.S. Aggregate Bond Index and the Citigroup 3-Month U.S. Treasury Bill Index.

Two Examples

The median five-year average annual return for a 529 plan portfolio invested 100% in equities returned 16.98%, compared with 17.56% over the same period for the benchmark, an 80/20 blend of the Russell 3000 Index and the MSCI EAFE Index.

However, when the annualized return of the benchmark was assessed a 15% federal capital-gains tax, it fell to 14.93%, or more than two percentage points below the annualized return of the tax-free 529 plan.

The 529 plan portfolio invested 100% in fixed income had a median five-year average annual return of 4.28%, while the Barclays Capital U.S. Aggregate Index benchmark returned 4.44%.

On an after-tax basis, the benchmark return fell to 2.89%.

“Our study suggests that 529 plan managers have done a good job investing the college savings entrusted to them,” founder Joseph Hurley said in a statement.

“It also underscores the importance of keeping fees in 529 plans low, since the benchmark returns assume zero costs.”

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