Age-based 529 plan adjusts automatically

For families seeking a hands-off approach to college savings, age-based 529 plan portfolios seem like a perfect fit. Just throw cash in and watch it grow as your portfolio automatically shifts from aggressive to conservative investments as your child gets older.

What most investors don't know is age-based portfolios vary tremendously in how plan managers allot your contributions.

Age-based portfolios are 529 asset allocation packages that plan holders can choose. Each 529 plan offers several portfolios based on risk tolerance and how fast assets move from aggressive to conservative investments.

Here's how to make sure your age-based 529 college savings plan is changing with your needs.

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.


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