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By Christine Benz | 10-22-2010 10:48 AM

Evaluating Age-Based 529 Plans

Morningstar's Laura Lutton offers tips for using Morningstar's tools to assess those college-savings plans that automatically grow more conservative as your child nears enrollment.

Christine Benz: Hi, I'm Christine Benz for Morningstar.com.

Morningstar.com has just launched a lot of new data and research about 529 college savings plans. Here to discuss it with us is Laura Lutton, she is editorial director for mutual fund research for Morningstar.

Laura, thanks so much for being here.

Laura Lutton: My pleasure.

Benz: So you and the team have put out a lot of great research, and one area I want to home in on is this category of age-based funds. So these are the 529 plans that get more conservative as your child gets closer to going to college.

I want to discuss how to evaluate those age-based options and how to determine first of all, whether you're better off going with the age-based option or trying to build your own 529 plan with individual static funds. What's your take on that question?

Lutton: Well, there is a lot of choices out there. Many 529 plans have multiple asset allocation choices for you, whether it's aggressive, moderate, conservative, or some plans have even more choices than that.

At Morningstar we were really curious to see, when you put all these options together how do they look? And so one of the new features on Morningstar.com are some graphics that will show you specifically what your choices are in which plan and how they line up relative to the industry norm.

So the typical 529 age-based option has about 80% of its assets in equities when a child is newborn and is close to or almost out of equities about the time that child enters college, but there are a range of choices around that norm that an investor has to sift through in making a decision.

Benz: So if I'm looking at that and say I'm looking at Illinois' plan, one of Illinois' plans. How do I tell, is this within the realm of normal? I can hop on the side and actually see its allocation...

Lutton: The site will show you relative to the norm, and then you really just have to make a gut-check decision. Is holding 10% of my college savings in equities at the time of enrollment, is that okay or is that too risky?

A lot of plans give you more than one choice, so if that does feel too risky there may be an option labeled "conservative" that goes completely into fixed income and cash earlier in your child life. So there are a lot of choices out there.

Benz: There are almost too many it seems.

Lutton: And sifting through them can be a challenge, and so we wanted to provide some tools to make that decision easier and give investors context with which to make that decision.

Benz: So as you've said, there are a number of these age-based plans that actually offer conservative, moderate, and aggressive flavors, and you all are categorizing funds within each age track based on whether its asset allocations is conservative, moderate, or aggressive.

How do I know, though, if I'm a college saver and looking to say for a child at a given age, how do I know whether I belong in the conservative, moderate or aggressive track? What can I do to assess my own ability to tolerate that risk?

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