College savings plans get more conservative

Personal finance

Eileen Ambrose -- Personal Finance

December 15, 2009|By Eileen Ambrose eileen.ambrose@baltsun.com

After last year's harrowing stock market ride, many college savings plans - including Maryland's - plan to play it safer.

These state-sponsored plans expect to add more conservative options, such as principal-protected funds or federally insured certificates of deposits. In Maryland's case, the Maryland College Investment Plan early next year will add a money market fund that invests in U.S. Treasuries.

"It was driven by a concern people had in the last year that they would like to have a safer option," says Joan Marshall, executive director of the College Savings Plans of Maryland, which oversees the state plan.

Last year was tough for many investors in so-called 529 college plans as the stock market crashed and drove down account balances. Even some families investing in age-based portfolios, which gradually get more conservative as a child approaches college, were unhappy to find they had greater exposure to stocks than they realized.

Families retreated. Investors essentially stopped opening new college accounts, says Bridget Bearden, a research analyst with Financial Research Corp., which tracks money in and out of 529 plans. And net contributions to plans fell by 33 percent to $3.7 billion in the fourth quarter of last year and the first quarter of this year compared to a comparable period a year earlier, she says.

Since then, though, the stock market has regained some lost ground and new accounts and contributions have picked up in the second and third quarters of this year, Bearden says.

In Maryland, contributions to the plan are down about 18 percent so far this year, compared with last year, according to Baltimore's T. Rowe Price Associates, which manages the state's plan. October and November contributions, though, are the same or higher than a year ago, Price says.

As bad as last year was, you can't give up on saving for a child's education, because tuition bills aren't going to go away. One of the lessons learned, though, is that you must keep on top of how your money is invested, even in age-based portfolios. Age-based investments allow you to select a portfolio based on the year your child enters college, but some plans invest more aggressively than others for children of the same age.

Under Maryland's plan, students in college can still have 20 percent of their money invested in stocks even though they are at the age where they are making withdrawals. That's a bit aggressive, considering investors are usually advised not to put money needed within five years into the stock market.

Maryland offers a short-term bond fund as a conservative alternative, although the more conservative money market fund launching Jan. 4 will likely give parents of teens nearing college or already on campus some peace of mind.

Marshall says she expects families to use the money market fund to park short-term money, say, funds needed to pay a tuition bill due in a couple of months.

"It's really not a good long-term solution," because investors will need the growth that the stock market provides to keep up with college costs, she says.

Nearly two-thirds of college savings plans already offer an ultraconservative option, including a money market fund, stable value fund, guaranteed fund or a bank certificate of deposit that's insured by the Federal Deposit Insurance Corp, according to Financial Research Corp.

Many states added these very conservative options years ago after the last bear market, says Joseph Hurley, founder of Savingforcollege.com.

Apparently, they will be adding more. An FRC survey in October found that four out of 10 plan managers expect to add an FDIC-insured option within the next year.

Other changes may be coming to 529 plans soon, too.

Because of last year's market plunge, the Internal Revenue Service allowed investors this year to change investments two times, instead of the usual once-a-year adjustment. And this year and next, money from college savings plans can be used to buy computers and Internet access for college students.

Under legislation pending in Congress, both provisions would be made permanent.

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