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By Rachel Haig | 06-11-2010 02:06 PM

The Top Risk Factors for College Savers

Morningstar mutual fund analyst Greg Brown discusses potential pitfalls, including overly conservative allocations, states' 529 tinkering, and a compressed drawdown window.

Rachel Haig: In a time of rising tuitions, stretched state budgets, and volatile markets, it's hard to blame college savers for being a little bit on edge. Here with me to talk about the top risks facing college savers is Morningstar mutual fund analyst Greg Brown. Thanks for joining me, Greg.

Greg Brown: Thanks for having me.

Haig: So, you've done a lot of Morningstar's 529 research. What would you say are some of the top risks facing college savers right now?

Brown: Well, I think one of the biggest risk, and it may not seem like a risk at first, is that college savers, you know, maybe have a temptation to get too conservative in a time when after coming out of the 2008 bear market and some problems we had in 2009, and then most recently with some of the setbacks we've had few months ago, I think it's – there's a temptation for college investors to be a little more conservative with their savings.

I think that's a particular problem for people that have young children that they are saving for college for, because you really have quite a bit of time to make up for any kind of market corrections. And ... one trend we noticed in the college savings market is a lot more CD options, a lot more money markets, a lot more ultra-safe, and that's responding to the market environment, and people demanding those, but I think people just have to be a little "cautious" because really the college tuition rate is going up quite quickly and those really can't keep up with college inflation.

Haig: So, you are saying people have in a big way over-compensated for the losses they may have seen in 2008, 2009?

Brown: Yeah. And I ... certainly feel the pain and there is a lot of uncertainty in the market right now. I just think there's a natural tendency to be – there is a potential to be overly conservative at a time when it may not be the best time to do that.

Haig: Have you seen the state plans leaning in a more conservative way too or is this more on an individual level?

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