College savers — like all investors — suffered big losses during the historic market downturn of 2008.
In the fourth quarter of 2007, state-sponsored 529 savings plans held slightly less than $130 billion in assets in 10.6 million accounts, according to figures from the College Savings Plan Network. By the fourth quarter of 2008, they held slightly less than $105 billion in 11.2 million accounts. That’s a loss of 19.2 percent in value even as the number of new accounts grew.
“The money people had invested in 529 plans was in the same financial market (in which) people had their retirement savings and other assets invested,” says Jackie Williams, director of the College Savings Initiative at The New America Foundation, a nonprofit public-policy institute. “And a large number of people actually saw their portfolio decline in value, because the overall market declined in value.”
It’s hard to blame college savers who got caught in the market meltdown for losing principal. But in hindsight, avoiding a few simple mistakes could have prevented some of their pain, according to experts.
Mistake No. 1: For example, investing in aggressive funds got many American families in trouble, particularly if their need to tap the accounts was imminent.
“If they were too aggressive in their allocation going into 2008, and in particular if their children were close to needing those funds … an overly aggressive allocation really devastated their situation,” says David Loeper, chairman and CEO of Wealthcare Capital Management in Richmond, Va., and author of “Stop the Investing Rip-Off.”
Mistake No. 2: Investors try to beat the markets by picking actively managed funds. But they often ended up picking mutual funds that couldn’t meet even the lousy performance of the wider markets, says Loeper.
Mistake No. 3: Many investors were blindsided by losses because they didn’t know enough about their 529 plan’s range of investments to judge accurately the risk they faced, says Loeper.
Finally, beginning a college plan too late robbed many parents — particularly those with children close to college age — of the compounding and tax-deferral benefits of 529 plans. To compensate for the lack of time, they exposed themselves to big risks, says Loeper.
Smart strategies going forward
The bottom line is that parents must take an active role in the management of the 529 savings plans they select for their children’s college education. Either that or they should hire a financial adviser to assist them.
If you hire someone, be aware that the adviser gets paid one way or another — frequently by selecting funds that charge sales loads.
If you’re a take-charge type person, take these steps to avoid future mistakes:
- Make sure you review your holdings periodically and shift your portfolio toward more conservative investments as your target date approaches. Not doing so leaves you at risk of losing principal right when you need it most. Target-date funds automatically do this for you. But be aware that not all such funds with imminent target dates escaped the market slaughter.
- Find a college savings plan that includes index funds. While you won’t beat the market, you’ll get the benefit of lower fees and commissions, with little risk of underperformance, Loeper says. “I’d avoid gambling on hopes to outperform.” This is particularly true as your child approaches matriculation age.
- Make sure you’re comfortable with the level of risk in the funds in your 529 portfolio. “While the states offer oversight of these (529) plans … that doesn’t absolve the individual investor from the responsibility to make sure their needs are being met,” Williams says.
- Finally, don’t wait until the last minute to begin saving for your children’s college educations. Begin saving for younger children now, says Judy Lawrence, author of “The Budget Kit” and publisher of Moneytracker.com.
“Each cycle, each decade, has its different story, but the key is to start early,” she says. “Start with a small amount and when gift money comes in for different things, sure, get them something, but always allocate some toward college.”
If you haven’t started a 529 plan by the time your child is in mid- or late-high school, other investment vehicles may serve you better, says Loeper.
Check out Bankrate’s College finance center to learn more about saving for college.
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