Once you start setting aside money for college, the next step is deciding how to invest it. Here are several of the common investment options and the different kinds of fees associated with them.
You have kids. Like 94% of American parents, you expect them to go to college. After reading my post last month about your different college savings options, you’re raring to go.
You get online or print out some paperwork to open the account, and then it hits you like a ton of bricks. Sure, you’re prepared to open an account and even put some money in it. But how in the world do you decide what to invest the money in? They don’t teach you this kind of stuff in school.
Don’t worry, I’m here to help. Today we are going to go through several different types of investment options, their pros and cons, and in which situations they make the most sense.
Age-Based Portfolio Options
If you’re at all familiar with target date retirement funds, then you have a step up, since these work the same way. Basically, you choose a date that you want to start spending your money. For college savings, it is age 18. Then, as the date approaches, your money is moved into more and more conservative investments. That way you have less of a chance of losing money the closer you get to needing it.
For example, a 2-year-old’s portfolio may be 90% stocks and 10% bonds, while a 9-year-old’s may be 50% stocks and 50% bonds and a 17-year-old’s is 10% stocks, 40% bonds, and 50% cash/money market.
A lot of people like age-based portfolios because they are designed so that once you put your money in, you never have to look at it again. The investments automatically change as your child ages.
On the other hand, as your investments get more conservative, your returns decrease. The older your child gets, the less money you make. By the time they are close to graduating high school, you hardly make anything on your money because the focus is preservation, not growth. Playing it safe like this may work well for people with enough money saved, but some people need their money to keep working for them longer than an age-based portfolio lets them.
Static Portfolio Options
These options are called static, not because they shock you when you go down a slide, but because they don’t change. Age-based portfolios automatically change, but static portfolios only change if you go in and make changes yourself.
Guaranteed Portfolio/Principal Protection/Interest Bearing Account
The goal of this kind of a portfolio is not to make money, it’s to avoid losing money. These are very conservative, akin to an FDIC-insured savings account. For example, the Oregon Savings Plan Guaranteed Investment Option has earned an average of 1.45% over the past 5 years.
If your kids are young, this is not the choice for you. These accounts are mainly used by people whose kids are within a couple of years of college and have already saved enough to fund their education.
Single-Fund Portfolio Options
In this option, all your money is invested into one single mutual fund. However, in most plans, participants don’t actually own shares of the fund directly. The returns generated will depend on the kind of fund you invest your money in. The Oregon Savings Plan offers 5 different options; the most conservative has earned average returns of -.02% over the last 5 years and the most lucrative has earned 13.66%.
This may be a good option for you if you have a specific fund that you want to invest in. Also, if you are interested in socially responsible investing, it may be available through a single-fund portfolio, such as Oregon’s Social Choice Portfolio. Make sure to research the portfolio’s values, though, because there is great variation in what people consider to be socially responsible.
Before choosing this kind of portfolio option, you should analyze the different funds offered and make sure there is one available to you that matches your growth goals, risk tolerance, and total cost.
Multi-Fund Portfolio Options
Multi-fund portfolio options allow you to invest in a portfolio that is invested in more than one mutual fund. These give you the most control over your investments, especially over your asset allocation. They also provide more diversification than a single-fund portfolio.
As with single-fund portfolio options, it is essential to analyze the different funds offered and make sure there is one available to you that matches your growth goals, risk tolerance, and total cost.
What About Fees?
Just like anything else, you shouldn’t purchase an investment without first checking the price tag. Yes, investing will cost you money. However, it should earn you a lot more money than it costs. The finance industry doesn’t always make their fees and costs crystal clear to consumers, so it’s up to you to verify what you’re paying. Here are some common costs:
Enrollment/Application
Some plans charge a one-time enrollment or application fee, just like colleges and gyms do. Not all do, though, so you’ll probably come across both kinds.
Account Maintenance/Program Management
This is a fee charged by the plan administrator to cover their costs. These vary, even within plans, and may appear as an annual fee or be tied to different services. For example, Utah’s 529 plan does not charge for online delivery of statements and official communications, but if you want them printed and mailed to you they will charge up to $12.
Investment Fee
These are the costs associated with the underlying investments of your portfolio. Investment fees vary depending on the fund and whether it is actively managed or indexed. Every fund has investment fees, and they can range from hundredths of a percent to several percents.
Sales Charges
Some 529 plans can only be purchased through a financial advisor or investment salesman. If you choose to go this route, it is vital to understand who you are purchasing from and how they are compensated. Sales charges are commissions paid to the financial professional. They can create conflicts of interest if the best option for you does not pay the highest commission. Registered investment advisors (RIAs) are required by law to act in your best interest, but registered representatives of broker-dealers are not. RIAs may waive the commission and charge you a direct fee instead.
A lot of savings plans offer clear fee breakdowns on their websites, such as Oregon and Utah. For others you will have to dig deeper. Don’t expect anything to be free, but you should make sure to know what you’re paying before you buy.
A lack of knowledge can make choosing investments for your college savings intimidating and overwhelming. Hopefully, this information has been helpful to you. Remember, don’t let the little details hang you up. Whether you pay .5% or .3%, what really matters is that you are saving for the future!
