Conceptually it was a great idea create a tax qualified college savings plan that would allow parents to accumulate college funds with tax-favored dollars. And, most people agreed by pouring billions into 529 plans. Then the bloom came off the rose when it was discovered that the plans were too restrictive, underperforming, and generally poor investments. The state sponsored plans soon began to wither as parents found other alternatives. Now, the states are beefing up their 529 plans, by adding some safety features and broadening their investment choices. Among the changes found in many state plans are:
The addition of FDIC-insured CDs and other savings instruments enabling investors to diversify into safe vehicles during times of volatility. The rates on 529 plan CDs tend to be higher than those found at your local bank. Just keep in mind that college tuition costs are increasing faster than CD rates.
Age-based options are available in many plans. Similar to target-date retirement funds, they target the college entry date of your child, and, as the time horizon to entry shortens, the fund automatically adjusts its weightings of equities, bonds and cash. The idea is to reduce the volatility of the fund as your child gets closer to college.
More states are adding outside funds to broaden the choice of investment mix. One of the primary complaints of parents was the plans were too limited with little opportunity to diversify. The downside is that the management fees of outside funds are generally higher.
When added to the tremendous tax advantages of 529 plans, these features can definitely increase their appeal as a college savings alternative. You need to check with your particular state’s 529 plans to see what is available.