Analyze your risk
The first step to figuring out what you need from an age-based portfolio is simply realizing that 529 plans usually offer multiple, age-based options that vary, depending on risk. In New York's 529 College Savings Program Direct Plan, investors have three age-based options. The most moderate equally splits investments between stocks and bonds when the child is a newborn through age 5. The most aggressive invests 100 percent in stocks. Some age-based 529 plan portfolios offer additional investment options such as foreign stocks and securities.
"If you're asking which age-based portfolio to go in, that's a conversation you have with a client to determine what their risk (tolerance) is," says Scott D. Edelman, president of Edelman Wealth Management Group Inc. in Yardley, Pa. "(Advisers) shouldn't make generalistic recommendations about those types of portfolios."
Edelman suggests that families choose their age-based portfolio after examining each type of portfolio option in a 529 plan, concentrating on how quickly it shifts assets to conservative investments as the child ages.
While there are several questionnaires designed to help you figure out your tolerance (Ohio's CollegeAdvantage 529 plan publishes this one), families can discuss their risk concerns with an adviser or accountant. If their risk tolerance doesn't align with their portfolio's asset allocation, account holders can switch 529 plan options once per year, according to the Internal Revenue Service.
Timing is everything
Each plan shifts investments according to its own time line.
"There are two basic types of age-based portfolios," says Steve Jobe, director of 529 programs for global investment firm BlackRock in New York City. "They look and feel very alike on the surface, but the year-of-enrollment approach tends to have a much smoother glide path."
Age-based portfolios automatically shift a portion of assets from aggressive to conservative funds on a predetermined date as the beneficiary ages, regardless of what makes sense in the current market, Jobe says.
Year-of-enrollment portfolios generally make asset shifts quarterly rather than once every three to five years like standard age-based 529 portfolios.