Best 529 Plans

Why go through the process of finding the best 529 plans?

I intend to put away a significant amount of savings for my daughter’s college ahead of time and using a 529 plan is the best way to save for her when she’ll be going to college.

Selecting the best 529 plans

Each state has their own 529 savings plan. Since you are not required to have a plan from your state of residence, you must choose between them. There are benefits to someone selecting their own state – most notably a state tax deduction. However, since mine has no state income taxes, I have no special allegiance to using its 529 plan. Even if your state has an income tax it is unlikely tip the scales far enough to compensate for the vast differences in quality between different state plans.

My criteria for considering something for my best 529 plans contenders list are simple: The plan must have an age-based automatically adjusted portfolio with sensible asset allocations. Whichever state fulfills the previous condition and has the lowest fees will be likely selected. Fees are the killer of returns and even a half of a percent of fee difference can be thousands of dollars in the future.

Many claim that Utah has the best plan because they have the lowest fees, has age-based portfolios, automatic withdrawals, and a quick and simple application process. Well, I’m done then. Time to go home. Not really. I’m not going to just take peoples' words. I need to dig down and really look at it for myself. Here's a nice link to Morningstar's Best and Worst Plans to look at some of the details.

Comparing Morningstar’s recommendations to Utah here brings up Illinois as a contender. Also, Utah has been recommended by my sister and many other websites as the best one generally. However, some in-state incentives may be too good to pass up. So after searching around more, it did indeed seem like it was down to Utah and Illinois. They both have very low fees in the 0.2% – 0.4% range and they both have simple age-based portfolios.

Looking at the contenders in detail

The linked Morningstar article claims that Illinois’ fees are lower than Utah’s and they’re right. Illinois has a very slight edge over Utah in fees if you select their lowest cost age-based option. Utah can be as low as 0.22% for a non-resident and Illinois as low as 0.20%. That is close enough to make my choice based upon their portfolio selections. (There is one additional consideration – Illinois only recently created their low fee option. Therefore, I must consider that it may not stay this way.)

The Illinois portfolio (pdf file) is odd to me for three reasons. The “Index Strategy” one is the low cost plan I'm referring to.

• They start putting money into a money market fund at 7-9 years old. This seems to me to be a bit early to be stocking away cash.
• Why are they using a money market fund instead of an FDIC insured money market savings account? Money market funds are not FDIC insured as we saw in 2008 when a few of them actually went belly up.
• Their last and final asset allocation is 70% bonds, 10% stocks, and 20% money market fund. The final allocation is supposed to be the most conservative, so my first instinct is to think that only 20% money market seems to not be conservative enough. Although, perhaps they don’t want to put most of the portfolio in cash that isn’t FDIC insured. Either way, it seems odd that they’d go into cash early in the child’s age, but not continue that conservativeness later on.

The Utah portfolio options (pdf file) seem to make more sense. Not only that, but there are at least 3 reasonable options that have small fees near enough to the 0.20% fees of the Illinois portfolio. 4 out of the 5 convert to 100% FDIC insured money market account when college enrolled. Moving the money into FDIC insured cash when enrolled in college is the most conservative move of them all. Even if stocks did really well while she was in college and she had a heavy stock portfolio most of the growth will probably already have happened.

I think Utah’s portfolios are far superior to the Illinois portfolio:

• I think the best 529 plans are Utah's 2, 7, and 8 options.
• Option 3 is way too aggressive – it holds 65% stocks and 35% bonds while she’s enrolled in college!
• Bonds are not better than stocks in the long run, so the bond-heavy option 9 doesn’t look right to me either.
• Option 2 is the simplest. It starts off 95% US stock index and 5% bonds and slowly moves more conservative by moving heavier into bonds and, eventually, some into cash. I like simple. It is easy to understand it typically gets the job done.
• Option 7 is aggressive. It is 100% stocks until the child is 7 and it doesn’t move into cash until the child is enrolled in college. It has a small amount in specialized funds over the course of the child’s life – mid-cap, small-cap, and international funds. It moves into 100% cash when Claire enrolls in college, but 0% before then.
• Option 8 uses the same specialized funds as option 7, but not with the same proportions. Its heavier weighted towards international stocks and it starts off with a heavier component of bonds, but finishes up with less. It begins to move into cash at age 13 – very much like option 2. This option will have the highest fees because the international funds have the highest fees and this option has the highest percentage of international funds. However, the fees aren’t that much higher topping out at 0.34%.

Which plan is best?

That’s tough – they each have their own qualities. I wish there were a portfolio with a lower fee international option.

Simplicity and low costs win me out on this selection with Utah's option 2. It has the lowest fees of all of the Utah age-based portfolios and it starts off aggressive and moves conservative as time goes on. Howover, it doesn’t have any mid-cap, small-cap, or international funds. Despite not being impressed with international economics as of late, I still wish it put 10-15% of its stock allocation into a non-US international stock fund, but, like with most things in life, nothing’s perfect.

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