Home Adviser Fund Update Popular 529 Plans Reviewed Published February 5, 2020 Table of Contents 529 Plans Reviewed The Adviser You Can Talk To Podcast: Maximizing Your Employee Benefits Fidelity Adds Fractional Shares State Street to Pressure Companies to Meet ESG Standards 529 Plans of Note In two recent Adviser Fund Updates, we covered the basics of 529 plans, followed up by a review of state-by-state tax treatment and financial aid implications. To wrap up the series, we’re taking a look at four 529 plans that are typically highly ranked by the media or industry watchdogs, as well as the four plans that Fidelity administers. If your state gives favorable tax treatment to 529 plan contributions, you may be happiest investing at home, however. The plans we’ve chosen to cover generally have a wide variety of portfolios, age-based tracks and, in some cases, individual funds to choose among. When comparing plans, after considering the tax implications, pay attention both to the funds and portfolios offered as well as expenses. Keeping costs down is a great way to help your investment go further, but it may be worth paying more in fees to get access to a manager or strategy you think has the potential to outperform over the long-term. Smart Ways to Save (and Pay) for Education Fidelity’s 529s The Fidelity 529 plans offer a decent variety of choices among pre-built portfolios and customization, but the plan’s portfolio construction could be a concern for some. Fidelity offers the same choices to all four state plans it manages. Arizona is a tax parity state, so residents can get the tax benefits no matter which state plan they invest in. Delaware and New Hampshire offer no tax breaks to 529 investors, so unless investing in Fidelity funds is a high priority, there is no additional benefit to choosing those states’ plans. For Massachusetts investors, Fidelity’s plan may be more enticing, as the state offers a $1,000 a year state tax deduction per taxpayer on contributions to the state’s 529 plan (up to $2,000 a year cap for a married couple filing jointly) for 2020. If you were able to create a fully customized portfolio out of the underlying options, Fidelity’s plans would be far more attractive—but you can’t. Unfortunately, the firm has gone the route of over-diversification. What do we mean by “over-diversification?” In the age-based tracks, the portfolios using Fidelity actively managed funds are made up of nearly 30 funds (eight of which are large-cap funds). Allocating among this many funds and managers defeats the purpose of active management, since any one manager’s contribution to the portfolio’s overall return will be minimal, and you’ll end up with thousands of underlying stocksA financial instrument giving the holder a proportion of the ownership and earnings of a company., basically giving you an overpriced index fund. The static options are marginally better, but they still are fairly bloated, with significant overlap within asset classes. The index fund portfolios (age-based and static) are much more streamlined, including at most five funds, and have recently come down in cost, with annual fees between 0.13% and 0.21%, undercutting some Vanguard options that charge 0.17% across the board. Finally, if you take Fidelity up on its customization option, you can choose among five index funds, cash, the age-based portfolios and the static portfolios (active and index). If you allocated among two or more of the static and/or age-based actively managed portfolios, you’d have the potential to not only be allocating twice to the same managers, but also essentially creating an expensive index fund. None of this is to say that one couldn’t effectively use one of Fidelity’s 529 plans to help pay for a beneficiary’s college expenses, and the in-state option deserves greater consideration from Massachusetts investors who now have a tax savings incentive to put their money here. But you should know what you’re getting into before choosing one of these plans. The Vanguard 529 The Vanguard 529 Plan is administered by Upromise Investments and sponsored by the state of Nevada. It features a range of Vanguard funds and is open to investors nationwide. The minimum initial investment is $3,000 ($1,000 for Nevada residents), significantly higher than that of many other 529 plans, but additional investments are just $50. Additionally, accounts can be linked to the Upromise rewards service for automatic transfers when you spend money at associated stores, restaurants and websites. The Vanguard plan offers three age-based options composed of Vanguard index funds distinguished by riskThe probability that an investment will decline in value in the short term, along with the magnitude of that decline. Stocks are often considered riskier than bonds because they have a higher probability of losing money, and they tend to lose more than bonds when they do decline. tolerance—aggressive, moderate and conservative—that gradually adjust to protect to varying extents against market volatilityA measure of how large the changes in an asset’s price are. The more volatile an asset, the more likely that its price will experience sharp rises and steep drops over time. The more volatile an asset is, the riskier it is to invest in. as college nears. The expense ratio for all of the underlying portfolios is significantly lower than most active plans. In addition to the age-based options, Vanguard offers 20 individual investment choices (either single or multi-fund, with a couple of active management options thrown in) that you can use to construct a custom portfolio. You can find fee and performance data here. Colorado, Iowa, Missouri and New York also offer Vanguard-run 529 plans and 23 other states’ plans include Vanguard funds. Virginia Invest529 Gold-rated by Morningstar, the Virginia 529 program was one of the country’s first and is available nationwide. The plan offers both actively and passively managed options, as well as a range of Target Enrollment portfolios in which allocations are automatically rebalanced as the intended college start date approaches. The portfolios invest in funds from a wide range of managers and fund providers, something that may appeal to investors looking for diversificationA strategy for managing investment risk by investing in a mixture of different investments. Since different asset classes face different risks, even if one type of asset declines in value, others may not.. However, portfolios overloaded with too many managers can dilute the effects (for better or worse) of active management, taking away the chance of one manager tanking a portfolio, while also reducing the ability of a top-notch manager to drive performance. Virginia’s plan divides the management of the age-based portfolios among 10 different firms and a wide variety of investment styles, including large-, small- and mid-cap domestic equitiesThe amount of money that would be returned to shareholders if a company’s assets were sold off and all its debt repaid., international and emerging market funds, real estate funds and high-yield bondsA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates.. (Performance and fee data can be found here.) That’s a lot of managers to keep track of, but the plan’s popularity speaks for itself. The Virginia Invest529 also offers six actively managed static portfolios (Stable Value, Global EquityThe amount of money that would be returned to shareholders if a company’s assets were sold off and all its debt repaid., ESG Core Equity, Active Aggressive, Active Moderate and Active Conservative) that do not change allocations over time and invest in the same funds that comprise the age-based offerings. (Fees and performance here.) In recent years, it’s also added nine passively managed portfolio options (Aggressive Growth, Moderate Growth, Conservative Income, Total StockA financial instrument giving the holder a proportion of the ownership and earnings of a company. Market Index, Total BondA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. Market Index, Total International Stock Index, Inflation-Protected Securities, Real Estate Investment TrustA legal document that functions as an instruction manual to how you want your money managed and spent in your later years as well as how your assets should be distributed after your death. Assets placed in a trust are generally safe from creditors and can be sold by the trustee in short order, avoiding the lengthy and costly probate process. Index and FDIC-Insured; fees and performance here). It should be noted that while Virginia’s plan does offer a good number of portfolios to choose among, you cannot create your own custom portfolio out of the underlying funds—the same is true of the next plan. This may be a deterrent to those with a strong desire to have complete control over their 529’s investments. T. Rowe Price College Savings Plan T. Rowe Price’s program, sponsored by the state of Alaska, offers 13 portfolios that give varying degrees of stockA financial instrument giving the holder a proportion of the ownership and earnings of a company. and bondA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. exposure, most of which are invested in actively managed funds. As with Virginia’s plan, investors can choose enrollment-based portfolios that shift allocations from stocks to bonds every three years based on the beneficiary’s expected college enrollment date. The plan also offers five static portfolios, the allocations of which do not change over time. Price and performance data is available here. You are allowed to switch portfolios once per calendar year should your beneficiary’s goals change. The T. Rowe Price offerings stand out because of their breadth of portfolio options and the active-management component. However, if expenses are more of a concern, a plan managed by Vanguard might be a better fit. my529 my529—formerly known as the Utah Educational Savings Plan (UESP)—offers a range of options to choose among. Its four age-based portfolios are similar to those in the Nevada plan above, with one key difference: my529 offers two variations on the aggressive track, “aggressive global,” which includes international stock funds, and “aggressive domestic,” which has a U.S.-only focus. It also offers moderate and conservative age-based options. The plan offers eight static options, which invest in a mix of Vanguard’s funds and range from 100% in stocks to 100% in cash. Both the age-based and static portfolios are invested exclusively in Vanguard’s mutual funds. Fee and performance data can be found here. my529 also allows 529 investors a great deal of flexibility in customizing their own portfolios. You can choose among more than two dozen underlying funds (which consist of Vanguard index and actively managed funds as well as several actively managed Dimensional Fund Advisors’ funds) to create your own age-based or static portfolios. The customized age-based option allows you to determine allocations among funds for seven age brackets and automatically reallocates every time your beneficiary hits the next stage (and rebalances annually in between allocation shifts). The customized static option also rebalances annually on the beneficiary’s birthday, but does not change otherwise unless you decide to make adjustments yourself. This plan and Nevada’s will likely have strong appeal for investors concerned with keeping expenses down and who want to create custom portfolios. Utah’s plan is a standout in that there are both index and active fund options for those who want to build their own portfolios. Next Steps We hope you have found our three-part crash course on the benefits of 529 plans educational. Regardless of which plan you choose, the sooner you start, the more time your contributions will have to earn compound interest and the greater your potential gains. As we’ve mentioned in past pieces, one of the greatest gifts you can give your child, grandchild or any young person you care about is an education free from (or low on) lasting debt. For further reading on the topic, we encourage you to read our special report on the topic, Smart Ways to Save (and Pay) for Education. If you have any questions about 529s or would like to learn more about financial planning services at Adviser Investments and how we can help you, please give us a call at 800-492-6868. * * * Smart Ways to Save (and Pay) for Education * * * The Adviser You Can Talk To Podcast: Maximizing Your Employee Benefits Employee benefits are one of the most powerful parts of your overall financial plan, but also one of the most commonly overlooked. Statistics show that effectively managing your benefits can boost them up to 30% of your compensation each year. That’s a fantastic return on the time invested. In this lively conversation, Senior Financial Planner Andrew Busa and Senior Account Manager Alden Witman go over numerous ways to take full advantage of what’s available to you and your loved ones. Among the key topics of discussion: Maximizing retirement investing vehicles like 401(k)s What benefits are portable when you switch jobs (and which ones aren’t) How to minimize risk when making benefits decisions Making savvy insurance and health care choices Employee benefits can maximize your earnings, protect your family and put you on the right track to a comfortable retirement. Don’t leave all that on the table—click here to listen today! * * * Fidelity Adds Fractional Shares Fidelity is making higher-priced securities accessible to people with less cash on hand. The firm is the latest in a wave of investment companies adding fractional share trading to their brokerage platform—though only through its mobile app. Fractional share trading allows investors to purchase a set dollar value of a stock or ETFA type of security which allows investors to indirectly invest in an underlying basket of financial instruments (these may include stocks, bonds, commodities or other types of instruments). Shares in an ETF are publicly traded on an exchange, and the price of an ETF’s shares will fluctuate throughout the trading day (traditional mutual funds trade only once a day). For example, one popular ETF tracks the companies in the S&P 500, so buying a share of the ETF gets an investor exposure to all 500 companies in the index. instead of having to scrounge up the full share price, enabling them to invest in names that might otherwise prove too pricy for their portfolios. High individual share prices have become more of a stumbling block for entry-level investors, with especially high-flying firms like Facebook, Amazon, Netflix and Google seeing their share prices soar in recent years—Amazon closed at $2,004.20 on Monday. (Tech stocks are by no means the only ones: a single Class A share of Berkshire Hathaway was trading at $334,860 on the same day.) Advocates say that allowing fractional share purchases can help open up stock trading to more investors, particularly younger investors still building their savings. “Fintech” startup SoFi started offering the feature last summer, with Charles Schwab and fellow startup Robinhood quickly following suit. Fidelity, which told Barron’s that mobile app users account for just over half of its trades, has leaped to follow—though it has not announced plans to offer fractional trading on Fidelity.com or the company’s Active Trader Pro platform. With trading fees across the major brokerage platforms now driven to zero, the shift to allowing fractional trading may be the sign of a further transformation in the fund industry. Fractional, dollar-based investing had long been a feature of mutual funds, one that differentiated them from ETFsA type of security which allows investors to indirectly invest in an underlying basket of financial instruments (these may include stocks, bonds, commodities or other types of instruments). Shares in an ETF are publicly traded on an exchange, and the price of an ETF’s shares will fluctuate throughout the trading day (traditional mutual funds trade only once a day). For example, one popular ETF tracks the companies in the S&P 500, so buying a share of the ETF gets an investor exposure to all 500 companies in the index., which usually require investors to purchase whole shares. Now that fund platforms are allowing fractional trades in stocks and ETFs, more ETF options may be coming to a 401(k) planA 401(k) plan is a retirement account that a company sets up on behalf of its employees. Both the participant and the employer can contribute to the account. There are two types of 401(k)s, traditional and Roth. Income invested in traditional 401(k)s isn’t taxed while it’s invested, but is taxed when it’s withdrawn. Income invested in a Roth 401(k) is taxed before it’s invested, but no tax is paid when it is withdrawn. near you. * * * State Street to Pressure Companies to Meet ESG Standards State Street Global Advisors (SSGA) plans to put its mouth where its money is, announcing to company boards that it plans to use its proxy voting power to nudge them to adhere to its environmental, social and governance (ESG) standards from here on out. State Street’s $3.1 trillion investment arm rolled out its “responsibility factor” last year, meant to measure how well companies do on various ESG metrics. Starting this coming proxy season, SSGA will “take appropriate voting action” against companies that fail to meet its standards, the investment firm informed boards in a January letter. Initially, SSGA will focus on companies that are performing particularly poorly on the ESG front, but beginning in 2022 the firm will also start actively voting on its corporate conscience on proxies from companies that they judge to have consistently lagged their peers on social responsibility. That’s a big break from past practice. Large index fund managers like State Street have historically taken a passive role when it comes to boardroom drama, deferring to management in proxy fights. A review conducted by Reuters last year of underperforming stocks which held proxy votes found that the big three index fund managers, BlackRock, Vanguard and State Street, voted with management 93%, 91% and 84% of the time, respectively. However, as index funds have risen in prominence—last year, for the first time, passive funds counted more assets under management than actively managed funds—the companies that run them are feeling the pressure to use their power. In January, BlackRock head Larry Fink announced that “sustainability- and climate-integrated portfolios can provide better risk-adjusted returns to investors” and that these investment styles would now be at the center of BlackRock’s investment approach. Such remarks may amount to little more than lip service, but with trillions in assets under their management, even symbolic gestures from the big indexers may be enough to make corporate boards jump. It remains to be seen whether it will impact bottom line decision-making—or give a boost to funds which claim to adhere to ESG standards. About Adviser Investments Adviser Investments is a full service wealth management firm, offering investment management, financial and tax planning, managed individual bond portfolios, and 401(k) advisory services. We’ve been helping individuals, trustsA legal document that functions as an instruction manual to how you want your money managed and spent in your later years as well as how your assets should be distributed after your death. Assets placed in a trust are generally safe from creditors and can be sold by the trustee in short order, avoiding the lengthy and costly probate process., institutions and foundations since 1994, and have more than 3,500 clients across the country and over $6 billion in assets under management. 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