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Special Report

Digging into a 529 Plan

We size up a college-savings plan with respect to three key criteria.

In earlier columns, my colleagues and I have outlined some of the issues college-savers should consider before taking the 529 plunge. We've profiled a couple of plan providers as well. Recent articles have highlighted the pros and cons of plans managed by TIAA-CREF and Vanguard, two of the mutual fund industry's low-cost providers.

In this column, I'll drill down from there and focus on the merits of a particular 529 offering--Massachusetts' U. Fund College Investing Plan. I'll examine how this case study rates in terms of three key criteria all 529 investors should consider: investment flexibility, fees, and incentives. Along the way, I'll put the plan's particulars in a broader context for investors who are mulling other options.

Investment Flexibility
The Bay State's plan comes up a winner in terms of investing flexibility. Managed by Fidelity, the plan offers a plethora of choices built around an "age-based" track and three static options. Think of the former as an asset-allocation fund whose manager ratchets down equity exposure in favor of fixed-income investments as your beneficiary approaches college age. Over time, this option moves from a maximum equity exposure of 88% to a tame, college-age portfolio in which stocks account for just 20% of assets.

The static options, meanwhile, include three portfolios: an aggressive, all-equity option; a moderate portfolio that features a 70/30 split between stocks and bonds; and a conservative option that invests exclusively in fixed-income instruments. Participants may also choose a custom approach and divide contributions among any three of the plan's age-based or static portfolios to achieve an asset mix that suits their goals and risk tolerance.

Those options give plan participants plenty of room to maneuver, but investment flexibility, of course, is only as useful as the options are strong. Fortunately, the quality of the plan's underlying funds is also quite high. Fidelity stalwarts such as  Dividend Growth (FDGFX),  Growth & Income (FGRIX), and  Spartan 500 Index (FSMKX)--a low-cost index offering--are available in most portfolios. All told, 13 of the plan's 18 funds have earned 4- or 5-star ratings, and Fidelity, one of the fund industry's premier shops, supports the plan with a large team of talented managers and a small army of analysts who provide behind-the-scenes research.

And that raises an important point: All investors should evaluate the strength of the shops that manage the plans they're considering. Some, such as Vanguard and Fidelity, have sterling reputations and ample resources. Lesser-known outfits, however, will likely require greater scrutiny.

The Massachusetts plan doesn't fare quite as well when it comes to expenses, but it's not among the pricier offerings, either. The expense ratios of the underlying portfolios here range from 0.58% to 0.86%, and Fidelity tacks on an additional 0.30% management fee for their services.