How to choose a 529 plan

The plans are a great way to save for college. But which should you invest in?

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If you read my recent article on 529 plans, then you already know I’m a big fan of them. You also know they’re a great way to save for those large tuition bills that are looming for your children and grandchildren. Now all you need to do is pick one.

Easier said than done. When you start to research 529 plans, you can become overwhelmed — fast — by all the options. So how do you choose the right one? Consider the following factors:

Pick a state, but not any state.

You’re not required to invest in the plan offered by the state where you live, where your grandchild lives, or where he or she is going to college. Still, it’s smart to take a look at your own state’s offering first, because you may get an additional tax benefit if you use it. If you decide it’s not a good fit for any reason, then by all means widen your search from coast to coast.

Follow the fees.

A 529 plan is going to cost you more than your traditional investments. There are fees to consider, such as entry fees. Also think about whether you want to invest in a “load” fund or a “no-load” fund. If you’re considering a load fund, I recommend getting into the C-class of shares. The annual fee will be higher, but your performance should be better overall. With A-shares, the fee comes out of the principal up front; B-shares cost more money annually and a carry a surrender penalty if you get out within the first four or five years.

No-load funds have an advantage because they are sold without a commission or sales charge. However, buying a no-load fund also typically means you don’t have a broker or specialist helping you. As a financial adviser, I’m biased, of course, but I think it’s better to use an expert to help you map out where your 529 funds should be invested. After all, you wouldn’t perform your own surgery, would you?

Embrace diversity.

Be sure the plan you choose is diverse enough to cover all bases in the fund family. Typically, you’d want to have what’s known as a “large-cap” domestic fund that specializes in growth, as well as a large-cap domestic fund that specializes in value. You might also want to add an international fund, or a small-to-mid-cap fund. Some fund families package a diversified portfolio for you.

Performance matters.

Don’t just skim the information provided by a fund, see that it has had double-digit growth for the past five years, and conclude that it’s great. You always need to compare a fund’s performance to its correlating index. (For example, compare a domestic large-cap fund to the S&P 500 index.)

Can you meet the minimums?

Every fund family has its own minimum annual investment. Make sure you know what that minimum is, and that it’s an amount that you’re comfortable covering.

Are you ready to risk it all?

While the topic of risk is an in-depth — and personal — one, find out where on the risk spectrum a particular fund is, and consider whether you’re comfortable with that investment strategy. Be careful not to be too conservative, though, because chances are you’ll only be holding this fund for 18 years or less. That allows you to be more speculative than you might be with your own longer-term retirement funds.

Will your investment mature as your grandchild does?

If you’re overwhelmed by the prospect of choosing the best mutual fund available within a plan, a packaged, “age-based” option of the type offered by many 529 plans, may be best for you. Simply put, this type of plan does the work for you by automatically adjusting investments based on your grandchild’s age. The closer Junior gets to Harvard (age-wise, at least), the more conservative the investments become.

Become a silent partner.

If your children have already opened 529 plans for your grandchildren, things become much simpler: You may simply be able to make an annual, third-party contribution, although not all plans allow this. And that could be the easiest choice of all.

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