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By Adam Zoll and Laura Pavlenko Lutton | 10-17-2013 12:00 PM

Which 529 Plan Options Are Best for Me?

With age-based and fixed-allocation options, and direct-sold and advisor-sold plans, college savers have a lot of choices, but it's often a gut-check decision as to what's right for them.

Adam Zoll: Once you've decided on a 529 college-savings plan, which one you want to use to save for college, there are other decisions that you also need to make.

Laura Lutton: Absolutely, and that's often where a lot of families get overwhelmed because there's a lot of choice in 529 plans and so you've got to sift through that. I think the first decision you want to make is do you want to set it and forget it and put your asset allocation in the hands of the professionals and that's what the age-based options--the ones that have the child's age in the name or maybe their graduation year from high school or some of them just have a random name--but what they all have in common is the asset allocation starts off, when your child is very young, to be very equity-heavy. And then as [your child] gets closer to college, [the allocation] steps down and has less exposure to stocks and more exposure to bonds and cash; it's more of a wealth-preservation vehicle at that point.

Zoll: Similar to the way a target-date fund might work in a retirement plan for example.

Lutton: Yes.

Zoll: And, aside from the age-based portfolio options, plans generally also offer a fixed allocation for people who want to change the allocation themselves as they go.

Lutton: Right. And often, there's more than one age-based track. Sometimes there's a conservative, moderate, and aggressive track, and then there are those fixed-allocation options which are similar to a 60-40 mutual fund where 60% of the assets are in equities and 40% are in bonds and cash. I think, when you're making your choice, often it's a gut-check decision. What do I feel comfortable with? How much risk do I want to expose these college-savings dollars to? I think, in the wake of 2008, we've seen a lot of families gravitating toward some of the more conservative options, and I think I would just caution college savers that tuition is increasing at a pretty quick clip, faster than inflation. So if you are putting your 529 assets in an investment that doesn't have a lot of appreciation opportunity, your nest egg may not be keeping up with that tuition inflation.

Zoll: Or you're going to have to put more into it, in order to achieve the amount that you [save].

Lutton: Absolutely. So that's another way to handle it. If you save more, you can take less risk in the 529 portfolio.

Zoll: Let's talk for a moment about direct-sold versus advisor-sold 529s. I think the market is roughly split down the middle in terms of plans that investors buy directly themselves, from the plan providers and 529 plans that they get through their financial advisors.

Lutton: Right. The direct-sold ones are the ones where you or I would go to the website and sign up ourselves. The advisor-sold plans are where you're working through a broker or a financial advisor. The benefit of doing it yourself is you're going to pay less, but then, the burden is on you to make those decisions on your own. That's, I think, why many people decide to go through a financial advisor. The advisor can look at their broader portfolios and sort of allocate the college assets appropriately based on some of your broader financial goals. But the expense ratios tend to be higher on those advisor-sold plans.

Zoll: Once you've picked the plan your decision-making process is not over. You still have a lot of other things to think about.

Lutton: That's true, and that's where families often pause. But for the most part, our research has found that the quality of those bits inside the plan is quite good, and so, the odds of you really screwing up are quite low, which is a good thing.

Zoll: That's certainly reassuring for a lot of people here I'm sure.

Lutton: Yes.

Zoll: Great. Well, thank you for sharing your insights with us.

Lutton: Thanks for having me.

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