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Section 529 plans have become very popular in the last couple of years, mostly due to the tax benefits and the relatively large sums that can be contributed. The law lets savers put in amounts up to the expected cost of a 4-year education, and we know what THAT can add up to.

A new article on Section 529 plans (sorry, the link will work for subscribers only ) in the Wall Street Journal points up the risks of these plans. Different states use different fund managers and varying types of portfolios, creating the real possibility of big declines in value. Last year, several of the worst performing 529 funds were Maine's - one lost 21% of its value.

Most states offer different portfolio options targeted at the age of the student. A student with 15 years before college could be in more aggressive investments, while someone who will be needing the funds in a year or two should be invested for minimum volatility.

Not that most states offer the ability to accumulate funds for out-of-state schools, Section 529 investors can shop around. It looks like it would behoove the investor to look carefully at the track record of the fund and have a clear understanding of what kind of securities comprise the portfolio. A 20% drop a year or two before college could be a real killer...

By Dadster on Saturday, January 26, 2002 - 10:20 am: Edit

It looks like that article moved, Roger. I did catch the same report earlier, though, and the results were, in some ways, predictable. The funds for kids who are toddlers now did worst, presumably because they invested heavily in stocks. The part that was a little scary was that even the BEST performing funds lost money, though not very much. These were funds targeted at kids who would be starting college in just a few years. You would think they would choose investments with little or no downside for funds that will be cashed in shortly.

Definitely a "caveat emptor" situation!

By Roger (Roger) on Sunday, January 27, 2002 - 09:33 am: Edit

Dadster, it looks like the Wall Street Journal reorganized their site, and the article I linked to moved. Here's the new article location: http://online.wsj.com/article/0,4286,SB101192982010000000,00.html
It will still work for subs only, I think. Here's a more general article, from Standard & Poors, that talks about the pros & cons of Section 529 plans. This article does note that the major risk in these plans is investment risk - they don't offer guaranteed returns. Neither do other equity investments, of course, but it's important that the buyer of these funds understands what he or she is getting into.