Saturday, July 14, 2012

529 Plans Diversifying with ETFs

English: ceramic piggy bank
(Photo credit: Wikipedia)
Diversification is the backbone to any investment plan. 529 plans are going to give investors more diversification by adding ETFs. They need to attract more investors and give them a larger choice of investments to purchase for their college savings plan. 

The 529 savings plans are a tax-advantage method for saving toward future college expenses. Parents can build a college savings fund that pays for a person’s room, board, mandatory fees, books, computer and tuition. Contributions in the 529 savings plan are not subject to federal tax as long as the money is used for college expenses. Today, mutual funds make up the largest share of the college-savings 529 industry.

Last year, on average, 529 plans lost almost 1% while the S & P 500 stock index returned about 2%. This caused a pull back in contributions. This addition of ETFs will not only hopefully attract more investors but also will give savers a more positive growth. 

Recently, Nebraska introduced four ETFs in three of its 529 plans. One of New York's plans recently added six ETFs, while Nevada's Upromise 529 moved almost exclusively to ETFs and away from mutual funds, which still dominate the college-savings industry. The addition of ETFs by 529 plans will give investors choices that will satisfy views that 529 investment choices are to risky.

What do the critics say?

The positive news is that they like the lower expenses ETFs offer. 529 plans with ETFs have an average expense of 0.61%, compared to the industry average of 1.12%. They claim 529 plan investment managers are adding ETFs in an attempt to make quick and easy changes to portfolio allocations at a fraction of the cost. ETF products can be traded throughout the trading day while mutual funds can only be reconstituted at the end of the day. 

Don't worry, the addition of ETFs are not changing the rules, you won't be allowed to buy and sell your investments in your 529 plan. 

These changes will attract more money in to the plans. You will have more choices in your investments. Diversification will benefit your 529 plans overall growth and help to minimize any market fluctuations. 

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