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2 Approaches to Adjusting the Asset Mix in 529 Plans

Jeff Holt, CFA

Jeff Holt: This week we released our updated Morningstar Analyst Ratings for more than 60 529 college savings plans. In evaluating these plans, we remain mindful of the experience of the hands-off investor. For these investors, 529 plans commonly have an all-in-one strategy that uses a beneficiary's age to determine the appropriate mix of assets. But investors should be aware of two distinct approaches to adjusting the asset mix. 

Similar to target-date funds in retirement plans, progressive age-based funds gradually become more conservative over time, shifting emphasis from stocks to bonds. Investors simply stay in the same fund over time. A couple of our most highly rated plans that have progressive funds include Gold-rated Virginia529 inVEST and the Silver-rated Maryland College Investment Plan.

The more common approach is for assets to be moved to different age-based static portfolios in a step-down fashion. Once the beneficiary hits a certain age, assets generally move to a portfolio that hold less stocks. In some cases, these shifts are large, as large as a 40 percentage point reduction in stocks, which increases exposure to market risk. However, multiple program managers have added more age-based portfolios to reduce the size of the steps. For instance, Vanguard runs more than dozen plans and recently began offering its plans a lineup with a 12.5 percentage point maximum step-down in stocks.

While hands-off investors may not want to make asset allocation decisions, they should be aware of the path they will take if they don't.