Maximizing College Savings through the Selection of Low-Cost 529 Plan Portfolios

Abstract

Parents and grandparents saving for descendent children and grandchildren’s college expenses seek to leave as large a nest egg as possible. As with most investments, the objective is to reach a high terminal value without taking excessive risk. In the case of college savings funds, a larger terminal value will expand the set of options available to the college-bound student. State and federal governments have worked together to make saving for college less onerous through the creation of tax-advantaged 529 plans. Analysis of the entire universe of 529Ps with 10 years of data reveals that a significant factor in differentiating between better and worse 529P investment performance is their expenses and their loads. Among the 529Ps with the lowest 25% of expenses, the authors find significantly better returns, lower standard deviation, and no appreciable impact on risk as measured by beta. Selection of 529Ps without loads also increases returns without increasing standard deviation or systematic risk. Risk-adjusted returns using standard deviation, negative return variance, or beta all demonstrate the value of avoiding high expenses and load/commission fees. Morningstar star ratings were also found to be higher, and downside capture ratios were found to be lower for the lower expense 529Ps.

TOPICS: Wealth management, information providers/credit ratings, performance measurement