New College Savings Twist

Date: December 15, 2014      Publication: Bottom Line Personal      Source:  Paul Curley, CFA, Strategic Insight      Print:

Opportunity or Danger?

Some college-savings 529 plans now are offering investments that go well beyond mainstream stocks and bonds. This is both an opportunity and a danger for parents, grandparents and other investors.

The new options for account holders, which include funds that invest in commodities, floating-rate loans, foreign government bonds and real estate investment trusts (REITs), are meant to allow account holders to increase ­diversification and thereby reduce overall portfolio volatility and perhaps boost returns. In the past year, such new investment options have been added to plans in at least nine states—Colorado, Illinois, Iowa, Missouri, New Mexico, New York, North Dakota, North Carolina and Wisconsin—with more states expected to follow.

What to do…


Review your current 529 plan’s investment offerings at the plan’s website or by phone. If you have selected an “age-based” investment portfolio that automatically adjusts your asset mix to become less risky as your student approaches college age, the new alternative funds may already be incorporated. If you have invested in funds of your choosing, you may want to add some exposure to the new alternative funds.

Consider moving some money into your plan’s principal-protected fund or money-market fund if there are no alternative funds available and you are seeking to reduce volatility.

Be aware that the new options can be risky, too. For instance, floating-rate funds, whose interest rates can “float” up and down according to market rates, invest in corporate loans that may be below investment-grade, which may provide higher yields but may end up with a company defaulting on the debt.

Source: Paul Curley, CFA, director of college-savings research at ­Strategic Insight, a financial research firm, Boston.