Looks like Washington is looking into a few enhancements of 529 plans, based on the findings from a report from the U.S. Treasury. From TheStreet.com:
Congress and the White House are working on new proposals that would keep college 529 plan expenses down, widen the use of such funds and possibly even allow parents to do what was once unthinkable – cross state lines to get the best deals, while still getting favorable state tax benefits.
This article over at The Street caught my attention today.
It suggests that the recent market downturn shows 529 plans are inherently flawed. I disagree.
It’s true that the investing time frame for college savings plans is shorter than retirement. So investing everything in risky stocks until a year or two before college is not a good idea. But most 529 plans offer “target date” funds that gradually shift to less risky investments as your kid or grand kid get closer to college.
Consider that, when you child is born, you have about a 20 year investment window. It would be silly to invest in a CD or other low rate security for 20 years. You need to understand that you can lose money, but not be so conservative that you miss out on spectacular tax benefits and earnings.
As millions of students head back to campus this fall, parents across the United States are thinking about how to pay the college bills. That means a renewed focus on 529 plans for everyone.
If you haven’t set up a 529 plan for your child or grandchild yet, start by doing your homework. 529s.com lists all states’ 529 plans and will help you understand the fees, tax breaks, etc.
The U.S. Internal Revenue Service has increased the flexibility of 529 plan contributions for 2009.
Effective this year only, you can change your 529 plan investment strategy (i.e., the funds you are investing in) twice per year. Previously you were limited to doing it once per year.
The “once per year” rule stung a lot of 529 plan participants in 2008. For example, consider someone whose kid was going to school in 2 years. In January 2008 they changed their investment allocation. Then the stock market started tanking and they wanted to move to safer investments to preserve capital given their short term investment horizon. Unfortunately, they couldn’t do so because they had already changed their allocation during the year. Under the new rule they could have changed it again.
Although you can now change it twice per year for this year, investors with a longer term horizon should be wary about shifting investments into lower risk assets just because the market is down. If this rule is not renewed, you will only be able to change once in future years.
Utah’s 529 plan, already one of the lowest cost options in the country, has dropped fees once again. It has also added a new investment option that focuses on international equities. The full press release is below:
(Salt Lake City) UESP continues to focus on the child by dropping fees and expanding investment options in conjunction with “National College Savings Month.” More money in their account now means more money for higher education later.
“It just got cheaper to save for college. Low costs and well-run underlying funds are important to investors when deciding how to save for a child’s higher education,” said Lynne Ward, Director of UESP. “The fee reduction and new investment option assist account owners, beneficiaries and UESP move closer to the shared goal of children receiving a higher education.”
“UESP makes it easy and affordable for Utah families to save for college. The Utah state tax credit and reduced fees provide an even greater incentive to start planning for your children’s future,” said Bill Sederburg, Commissioner of Higher Education.
Fee Reduction
Underscoring its already low-cost reputation, UESP is reducing fees again, providing individuals an opportunity to put more money toward future college expenses. The Administrative Asset Fee will be reduced 12%, and the Administrative Maintenance Fee is being lowered 25% on all investment options effective October 1, 2008.
The total range of Asset Fees on any UESP investment option will be 0.22% to 0.34%, which includes the Vanguard underlying expense ratios. The fee is assessed quarterly, on the last day of each quarter.
The Administrative Maintenance Fee will fall from $20 down to $15 annually. That is only $3.75 per quarter for accounts with $5,000 or more. Accounts with less than $5,000 are charged only 0.075% of the balance each quarter. The fee is assessed on the last day of each quarter.
Utah residents who invest in Option 1—Utah Public Treasurer’s Investment Fund are assessed no fees when saving for a child’s higher education. Additionally, the Administrative Maintenance Fee is waived for all Utah residents, regardless of investment option.
New Investment Option
A new static investment option with more exposure to international equity funds will be available to account owners October 1, 2008. This option results in the highest allocation in international securities of any current UESP product:
* 70% in the Vanguard Institutional Total Stock Market Index Fund (VITSX)
* 30% in the Vanguard Institutional Developed Markets Index Fund (VIDMX)
This new investment option (Option 10 Equities—30% International) will provide investors with greater access to the world market and growing regional economies.
The Vanguard Institutional Total Stock Market Index Fund seeks to track the performance of the MSCI U.S. Broad Market Index. The fund typically holds 1,200 to 1,300 stocks in its target index (95% of the U.S. Broad Market Index) and a representative sample of the remaining stocks.
The Vanguard Institutional Developed Markets Index Fund seeks to track the performance of the MSCI Europe, Australasia, Far East Index by investing all, or substantially all, of its assets between the Vanguard European Stock Index Fund and the Vanguard Pacific Stock Index Fund, based on the market capitalizations of European and Pacific stocks in the Index.
Visit www.vanguard.com to learn more about these underlying funds.
To learn more about the Utah Educational Savings Plan, call 800.418.2551 or visit www.uesp.org.