Funding your 529 plans in down market can be a good strategy

529 plan allocations and fees can be outrageous!!

Know what you're invested in. Have a strategy.

I was just digging into the underlying investments of my kids 529 plans at Fidelity. Obviously, I should know exactly what's in there; I'm a financial advisor after-all. Well it wasn't exactly what I expected and I was shocked.

BTW, I previously wrote about the importance of 529 savings due to the outrageous cost of education.

529 Plan Contributions

The ideal method to contribute to your 529 plan is to have a fixed amount automatically withdrawn from each paycheck and deposited to your child's 529. Simple. No thought involved. And you invest smoothly overtime catching downtrends and uptrends (dollar cost averaging).

Some people choose to lump-sum the contribution once or twice a year. When I say "Fund your 529's now" I'm talking to those people. Markets are still down about 15% year-to-date so by investing now you are theoretically "buying low". Markets may still go lower, but you're likely going to get a nice return over the next few years.

Reviewing my 529s

I made the allocations 10 years or so ago. I chose the most aggressive allocation profile and set it to "static" and "aggressive growth". There are 40+ options so it can be very confusing for an inexperienced investor. I'm very risk tolerant, so aggressive it was. "Static" means the portfolio allocation doesn't change based on age/timing; consistent with my aggressive philosophy.

Now that my daughter is 3 years from college, I figured I'd better give the plan a visit.

I WAS SHOCKED!

Turns out there are about 40 different options -- information overload. Below is a screenshot of some.

529 Plan Fees

Digging into the "Aggressive Growth" strategy. There are two: Index and Mutual funds. Turns out I was invested in the Mutual Funds. Big mistake! I was paying almost 1% in fees. That is a lot! My guess is "index" was not available when I initially allocated. The Index fees are only 0.13%. Still high, but 87% lower than mutual funds. Always choose Index.

529 Investment Allocation

This is what shocked me even more! Their definition of "aggressive" was 44% foreign equities: I call that asinine. Aggressive to me, means Technology and growth stocks and maybe 20-30% foreign equities. Foreign equities have underperformed the US markets during the last decade; so our 529 investments underperformed.

BTW, S&P 500 companies derive 40% or more of their revenue from foreign markets, so owning "foreign" stocks as diversification has become less important.

My Solution

I just moved both my kids' holdings and future allocations to the S&P 500. Simple, great returns and inexpensive. And BTW, the fee is still 0.11%, which is bananas, considering Fidelity's S&P 500 Index fund available to the public only charges 0.02%. So its 5x more expensive! But it's still the best option.

Red circles below: Bad.

Green circles: Good

Much of the finance world exists by simply extracting money from the less informed. 529 plans are no different; they are riddled with inefficiencies and non-sense.

This is not a broad recommendation for most people. Consult your advisor. But, do review your 529 strategy periodically.

Questions: sean@hathawayfinancial.com