529 Plans Suffered in Q1 but Continue to Evolve

Despite uncertainty about the upcoming academic year due to the coronavirus pandemic, at least one constant remains in the college planning process: the benefits of 529 savings plans.

They remain one of the primary vehicles to help finance a college education because their assets grow tax-free and their withdrawals are tax-free so long as the funds are used for qualified educational expenses.

Moreover, fees for 529 plans have been falling and the structures of many have been improving with smoother glide paths for age-based portfolios, according to a new report from Morningstar.

Fees for the average direct-sold age-based portfolio in 529 plans fell to 0.35% in 2019 from 0.39% in 2018, and for the average advisor-sold portfolios they dropped to 0.89% from 0.93%, according to Morningstar. The price discrepancy between the two types of plans reflect not only commissions involved on some advisor-sold plans but the fund investments themselves. At least 80% of the portfolios in direct-sold plans are invested in index funds, the same percentage that’s invested in actively managed funds in advisor-sold plans.

529 plan investors, like many others, have been favoring cheaper direct-sold plans, which account for about 60% of 529 plan assets. Their assets grew 7.3% last year while the assets of higher fee advisor-sold plans grew just 2.8% over the same period.  

Overall, more 529 plans have adopted smoother transitions for age-based portfolios, which shift the balance between stocks and bonds as students approach their college enrollment years. More plans are taking smaller steps, typically 10 percentage points, when shifting the balance between stocks and bonds, which reduces the variability of results while improving or stabilizing investment outcomes, according to Morningstar.

But the volatility in markets due to the COVID-19 pandemic has taken its toll. Their losses ranged from less than 5% to up to 19% depending on how aggressive the allocation was.