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529 college savings plans lag S&P 500MONEY AND MORE Kathy Kristof 529 college savings plans lag S&P 500 10/02/2005California State Treasurer Phil Angelides decried the rapid rise in higher-education costs recently as he touted the state's college savings plan to about 200 students, teachers and onlookers at Trinity Elementary School in Los Angeles. What he didn't mention was that those who had been investing in the Golden State Scholarshare fund over the last five years hadn't come close to earning enough on their accounts to keep pace with rising college costs. "The program has trailed the benchmarks, but we have made a number of changes and the performance has improved," Angelides later acknowledged. "People have to look at this as a long-term endeavor." Of Scholarshare's 12 funds that have five years of investment history, the best performer is a guaranteed option -- much like a savings account -- which has paid 4.29 percent a year on average. The remaining funds have posted average annual returns ranging from a high of 1.8 percent to a low of negative 3.68 percent. Over the same five-year period, the S&P 500 was down 2.71 percent. Such dodgy performance may not be unusual in the relatively new realm of state-sponsored college savings plans -- dubbed "529s" for the section of the U.S. Tax Code that defines them. But comparisons are difficult because most of the plans have existed only since 2002, when tax laws changed to make them more attractive to high-income families looking for a tax-deferred way to save. Joseph Hurley, founder of SavingForCollege.com, a Web site devoted to rating and analyzing college savings plans, recently surveyed the performance of 50 of the 85 different plans and found that they vary markedly. Among the all-stock investment options, Hurley said, performance varied by huge margins, with the best-performing plans earning more than 11 percent a year on average over the last three years and the worst registering gains of just 4.4 percent. Over the same time period, the Standard & Poor's 500 stock index returned 12.02 percent a year, according to Ibbotson & Associates, a research firm in Chicago. Such mediocre returns left experts with mixed views of the plans. "A 529 plan is a mutual fund in another dress," said Brian Greenberg, a New Jersey accountant who specializes in college saving strategies. "They are a good partial solution, but not a total solution." What are the pros and cons? Tax breaks Pro: Investment returns accumulated in a 529 plan are tax-free as long as the money is used for qualified higher education expenses -- that's generally tuition and fees, plus room and board for full-time students. Con: If the money is not used for college, the investment returns are taxed at ordinary federal income-tax rates as high as 35 percent -- not preferential capital-gains rates that max out at 15 percent. In addition, there's a 10 percent federal income-tax penalty. States generally impose taxes and penalties on withdrawals that are not used for college costs, too. Then, too, middle-income taxpayers could be giving up tax credits when they pay for college with 529 assets, Greenberg said. Investment options Pro: The plans are professionally managed and, usually, widely diversified. Some have low-maintenance options called "age-based portfolios" that adjust their investment strategy according to how soon the beneficiary will need the money. That provides some simplicity and investment stability for parents who don't want to take big risks or closely manage portfolios. Con: There are so many plans to choose from that even experts say that making a choice can be difficult. Meanwhile, only a few 529 plans allow investors to fine-tune their investment mix. Fees Pro: In some cases, the fees are higher because the plans offer plenty of services and allow small regular investments of as little as $25 a month. Super low-cost funds simply can't afford high-maintenance, low-balance accounts. Con: The plans are more expensive than similar mutual funds -- sometimes dramatically so. Aid and other considerations Pro: The accounts are considered the asset of the donor -- not the beneficiary -- and that's better for financial-aid purposes. Specifically, where having $10,000 in a child's name would reduce that child's eligibility for aid by roughly $3,500 a year, having that much in the parent's name would reduce aid by only about $500. Con: If the intended beneficiary turns out to be a brilliant entrepreneur and doesn't want or need to go to college -- but could use the college savings to launch his business -- accommodating that request could cost plenty in tax penalties. Kathy Kristof is a personal finance columnist with the Los Angeles Times. Write to Personal Finance, Business Section, Los Angeles Times, 202 W. First St. 90012, or e-mail kathy.kristof@latimes.com. Homepage Other open community sites http://www.business-business.biz Please support are sponsors. To design you custom retirement plan. http://www.retirement-plan.us For planning a IRA rollovers. http://www.ira-rollover.us Professional asset allocation and the wonders it can do. http://www.asset-allocation.us Professional money management: National ranked performance. http://www.roth-ira.us Managers selected to fit your needs. http://www.money-managers.us |
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