529 Investment Option Selection

Selecting the right investment options within your 529 plan significantly impacts how much money will be available when your child starts college. Most plans offer three main approaches: age-based portfolios that automatically adjust over time, static portfolios with fixed allocations, and individual funds you select yourself. Understanding each approach helps you match your investment strategy to your family's timeline and risk tolerance.

Age-Based Portfolios: Automatic Glide Paths

Age-based portfolios are the most popular choice among 529 investors, and for good reason. These portfolios automatically shift from aggressive investments when your child is young to conservative investments as college approaches.

How Age-Based Portfolios Work:

When you enroll, you select an age-based option that corresponds to your child's current age or expected enrollment year. The portfolio starts with a higher allocation to stocks (often 80-90%) and gradually reduces stock exposure while increasing bonds and cash equivalents as your child ages.

A typical age-based glide path might look like this:

Many plans offer multiple age-based tracks—aggressive, moderate, and conservative—allowing you to choose how much risk you're comfortable with while still benefiting from automatic rebalancing.

Advantages of Age-Based Portfolios:

• No need to monitor or adjust investments manually
• Automatic risk reduction as college approaches
• Reduces the chance of significant losses right before you need the money
• Simple to understand and maintain

Disadvantages:

• Less control over specific asset allocation
• Glide path may not match your personal risk preferences
• One-size-fits-all approach may not suit every family's situation

Static Portfolios: Fixed Allocations

Static portfolios maintain a consistent asset allocation regardless of your child's age. You choose an allocation that matches your risk tolerance, and it stays the same until you decide to change it.

Common Static Portfolio Options:

When Static Portfolios Make Sense:

Static portfolios work well when you want more control over your asset allocation or have a specific investment philosophy. For example:

• A family saving for a child already in high school might choose a conservative static portfolio rather than an age-based option that would become even more conservative over a short period.
• A family with substantial other assets might maintain a more aggressive allocation knowing they have backup funds if the 529 loses value.
• A parent who closely follows their investments might prefer adjusting allocations manually based on market conditions and their child's timeline.

Important Consideration: With static portfolios, you're responsible for monitoring and adjusting your allocation as college approaches. Failing to reduce risk in the years before college could result in significant losses at the worst possible time.

Individual Fund Options

Most 529 plans also offer individual funds that you can combine to create a custom portfolio. These typically include:

Index Funds: Track market indices like the S&P 500, total U.S. stock market, international stocks, or bond indices. Index funds offer broad diversification at low cost.

Actively Managed Funds: Professional managers select investments attempting to outperform the market. These funds charge higher fees and have inconsistent track records compared to index funds.

Target-Date Funds: Similar to age-based portfolios but structured as single funds. You select a fund based on your child's expected college enrollment year.

Specialty Funds: Some plans offer sector funds, real estate funds, or socially responsible investment options.

Building a Custom Portfolio:

If you choose individual funds, you'll need to:

1. Determine your target asset allocation based on your child's age and your risk tolerance
2. Select funds to implement that allocation
3. Rebalance periodically (most plans allow changes once or twice per year)
4. Gradually shift to more conservative holdings as college approaches

This approach requires more knowledge and attention but provides maximum flexibility.

Understanding Expense Ratios

Every 529 plan charges fees that reduce your investment returns. The expense ratio represents the annual percentage of your assets paid in fees.

Typical Expense Ratio Ranges:

• Low-cost index options: 0.10% - 0.25%
• Age-based portfolios: 0.15% - 0.40%
• Actively managed funds: 0.40% - 0.60%

Impact of Expense Ratios Over Time:

The difference between a 0.15% and 0.50% expense ratio might seem small, but it compounds significantly over 18 years.

Consider a $50,000 account balance with an 8% gross return:

The account with a 0.50% expense ratio has $11,400 less than the account with 0.15% fees—money that goes to fund managers instead of your child's education.

When comparing plans, look for the total annual asset-based fee, which includes the underlying fund expense ratios plus any plan-level administrative fees.

Worked Example: Age-Based vs Static for a 5-Year-Old

Scenario: The Martinez family has a 5-year-old daughter and wants to compare age-based and static portfolio strategies for their 529 plan. They plan to invest $300 per month for 13 years until she starts college.

Option A: Age-Based Portfolio

Using a moderate age-based track with the following expected returns at each phase:

• Ages 5-10: 7.5% average return (75% stocks, 25% bonds)
• Ages 11-14: 6.0% average return (55% stocks, 45% bonds)
• Ages 15-17: 4.5% average return (35% stocks, 65% bonds)

Estimated final balance: $72,400

Option B: Static Growth Portfolio (70% stocks, 30% bonds)

Maintaining a 70/30 allocation throughout with an expected 6.8% average return:

Estimated final balance: $74,100

Option C: Static Aggressive Portfolio (90% stocks, 10% bonds)

Maintaining 90/10 allocation with an expected 7.8% average return:

Estimated final balance: $78,300

Analysis:

The aggressive static portfolio projects the highest ending balance, but it carries meaningful risk. If the stock market drops 30% in the daughter's junior or senior year of high school, the aggressive portfolio could lose over $20,000 right before college starts. The age-based portfolio would have already shifted to 35% stocks by that point, limiting losses to around $8,000.

For the Martinez family, the best choice depends on:

• Their overall financial picture and ability to absorb losses
• Whether they have other funds available for college expenses
• Their comfort with monitoring and potentially adjusting a static portfolio
• How they would feel if aggressive investing led to losses near college

For most families, the age-based portfolio provides appropriate risk management without requiring ongoing attention.

Changing Your Investment Options

Most 529 plans allow you to change investment options for existing balances once or twice per calendar year. New contributions can typically be directed to different options at any time.

Plan your investment option changes carefully since you have limited opportunities to adjust. If you're switching from an aggressive to a conservative option as your child ages, you might plan changes every few years rather than waiting until the last minute.

Some life events may warrant revisiting your 529 investment selections:

• Your child is within 5 years of starting college
• A significant inheritance or windfall allows a large lump-sum contribution
• Your family's financial situation changes substantially
• You become uncomfortable with portfolio volatility

529 Investment Selection Checklist

Use this checklist when choosing and reviewing your 529 plan investments:

• Review your child's age and years until college enrollment
• Assess your risk tolerance honestly (how would you react to a 25% loss?)
• Determine whether you want hands-off management or active control
• Compare expense ratios across available options
• If choosing age-based, select the track (aggressive, moderate, conservative) that fits your risk profile
• If choosing static or individual funds, create a plan for reducing risk as college approaches
• Set a calendar reminder to review your investments annually
• Check whether your state's plan offers investment options from low-cost providers like Vanguard, Fidelity, or Schwab
• Document your investment rationale so future decisions are consistent
• Understand the plan's rules for changing investment options (frequency limits, deadlines)