Lesson Learned: Some 529 Plan Guarantees Are Better Than Others

This article was written with Steve Cordasco, of Cordasco Financial Network. It's part of a series of articles developed under an agreement with thestreet.com to work with a variety of contributors and assist them in delivering actionable investment ideas each week.

David Evanson and Steve Cordasco

TheStreet.com, Winter, 2012

So-called Guaranteed Savings Plans for college seemed too good to be true.

In essence, by offering a plan tied to the rate of inflation for educational institutions, state-sponsored Guaranteed Savings Plans gave college savers the opportunity to lock in tuitions at rates on the day they start saving.

For many, it was too good to be true. For instance, out in Illinois, where state budget troubles are the stuff of legend, the program had to be shut down for a year to new enrollees. When the investments donzzt cover the cost of rising tuitions, who makes up the difference?

In some cases, itzzs consumers who will or have had to pay. One of the worst-case scenarios for parents saving for college is the belief they have college expenses tackled, only to find out at the last minute that in fact they donzzt.

I was therefore surprised and pleased to learn during my radio interview with Pennsylvania state treasurer — and likely gubernatorial candidate — Rob McCord, that Pennsylvaniazzs Guaranteed Savings Program is now fully funded and guaranteed.

This means in the Pennsylvania 529 Plan the principal is protected, and this means the Plan, not each account owner, assumes the risk for covering tuition inflation increases.

For college savers, the importance of the guarantee is this: You can earn inflation-indexed returns right up to the end. By contrast, there are many college savings vehicles that are timed to when Junior enrolls for his first semester.

This seems to make sense, but keep in mind that every product I know timed to a specific event changes to an increasingly more conservative allocation as the expiration date nears.

Logically, this makes sense, as you do not want to lose principal in a market swoon just before your child goes off to college. However, likely it means your returns diminish as enrollment approaches because your savings will be allocated to lower-yielding but much safer fixed-income investments.

However, with a guarantee in place, college savers can reap all of the benefits of inflation-indexed returns investing right up to withdrawal date(s), with none of the downside associated with aggressive investing — namely loss of principal.

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