Fidelity Manager Retiring
On January 31, Fidelity announced that Chuck Myers will be leaving his role as portfolio manager at the firm’s Small Cap Discovery fund at the end of 2017. (You read that right, Fidelity has given investors 11 months to get used to the idea and the managers the rest of the year to handle the transition as smoothly as possible.)
Myers’ Small Cap Discovery co-manager, Derek Janssen, will assume sole responsibility for the fund on January 1, 2018. At the same time, Clint Lawrence was added as a manager of Small Cap Value, which he will co-manage with Janssen.
As of January 31, Small Cap Discovery had nearly $5.8 billion under management. Small Cap Value’s assets under management were more than $3.5 billion at that time. Both funds are currently closed to new investors. (As we’ve mentioned in past updates, it’s not uncommon for small-cap focused strategies to close at this seemingly low level of assets, which maintains the managers’ ability to make meaningful investments in smaller companies’ stockA financial instrument giving the holder a proportion of the ownership and earnings of a company.
. Compare this to Fidelity’s Contrafund, which has a large company focus and remains open at over $104.0 billion in assets.)
Janssen became a co-manager of Small Cap Discovery in 2016 and co-managed Small Cap Value with Myers from January 2013 through January 2015, when he became the sole manager. That experience of working with Myers suggests to us that the funds’ investment philosophy and approaches are unlikely to see any dramatic changes.
Lawrence is a 10-year Fidelity vet, having worked under Myers, Janssen and other managers that include Joel Tillinghast and Jamie Harmon, providing analysis of the financial, energy and industrial sectors. Prior to taking his expanded role on Small Cap Value, Lawrence focused on small-cap financials on Fidelity’s equityThe amount of money that would be returned to shareholders if a company’s assets were sold off and all its debt repaid.
The decision to leave appears to be entirely Myers’ own (he’s retiring, albeit at a relatively young age), and not related to any performance issues. In fact, during Myers’ tenure, from March 1, 2006 to December 31, 2016, Small Cap Discovery outperformed 99% of its Morningstar small-cap peers. We don’t believe the changes are an immediate cause for concern for investors.
529 Plans in the Spotlight
529 plans were back in the news last month with the introduction in Congress of the “529 and ABLE Account Improvement Act of 2017.” The proposed bill would ease the burdens on employers who want to create payroll deductions, and would also allow the use of 529 account assets to pay back student loans or donate money to charities. In addition, the legislation would lift restrictions on the number of investment changes you can make in a calendar year (currently limited to two).
While it may be some time before we know this bill’s fate, 529s as they currently exist are something anyone interested in contributing to a loved one’s college tuition should know about.
A Smarter Way to Save for College
529 plans are fantastic, tax-advantaged vehicles designed specifically for investors helping a child, relative, friend or even themselves save for tuition and expenses related to higher education. Plans are sponsored by states, generally in partnership with a mutual fund company or institute of learning, and usually offer either a number of investment options to choose among or a means of locking in a tuition rate. Anyone can set up a 529 plan for a designated beneficiary, and all withdrawals that go towards “qualified educational expenses” (which include tuition, room and board, books, a computer and peripherals, and even internet access) are exempt from federal and (usually) state taxes.
There are no income restrictions and no limit to the number of plans you can enter into, though withdrawals above and beyond the costs of those qualified education expenses (or non-qualified withdrawals in general) are subject to federal and state income tax, as well as a 10% penalty.
Even though 529 plans have been around since 1996 (the “529” comes from the relevant section of the Internal Revenue Service’s tax code), a May 2016 Edward Jones survey found that 72% of Americans did not know what they were. Despite this relative lack of awareness, by June 2016, there was more than $266 billion in total assets invested in these potent savings vehicles.
With the average annual cost of tuition, room and board at a four-year private college continuing to soar (up 3.4% year-over-year to $45,370 in the 2016–2017 school year, and considerably more at the most exclusive schools), parents, grandparents and other interested benefactors cannot start saving soon enough.
Two Types of 529s, Equally Tax Exempt
529 plans come in two flavors: Savings plans and prepaid tuition plans—take a look at the table below to see a list of characteristics for each. States have their own unique plans, and are allowed to offer both savings plans and prepaid tuition plans. Many states do offer additional tax benefits for residents, but you are not restricted to the plan in your home state. For certain investors, it will be worthwhile to explore plans in other states to find the best fit.
A good comparison for savings plans is a Roth IRAA type of account in which funds can be saved and invested without being subject to tax until the account holder reaches retirement age.
, to which you contribute after-tax income and then can take tax-free withdrawals from in retirement (for more on Roth IRAs, please click here
). A 529 plan operates under the same basic principle (contributions cannot be deducted from your federal taxes), but is solely geared to the costs of college or university. Your 529 will be invested in mutual funds, so your return depends on the performance of the holdings in your portfolio. You’ll have the opportunity to invest in a selection of individual stock, 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.
and money market funds, and many plans feature pre-made portfolios, including age-based options that automatically reallocate funds from stock holdings to lower-risk bond and money market funds as the beneficiary gets closer to college age.
The Two Types of 529 Plans
|College Savings Plan
||Prepaid Tuition Plan
|No lock on secondary education costs.
||Locks in tuition prices at eligible public and private colleges and universities.
|Covers all qualified higher education expenses: Tuition, room and board, fees, books, computers, internet access.
||Plans cover tuition and mandatory fees only.
|Many plans have contribution limits in excess of $300,000 per beneficiary.
||Most plans set lump sum and installment payments prior to purchase based on age of beneficiary and number of years of tuition purchased.
|Investment options are subject to market 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.. Your investment could decline in value.
||Many state plans backed or guaranteed by the state.
|No age limit. Open to adults and children.
||Most plans have age/grade limit for beneficiary.
|No residency requirement. Nonresidents may only be able to purchase some plans through financial advisers or brokers.
||Most state plans require owner or beneficiary to be state resident.
|Can change beneficiary to another family member if money is no longer needed.
||Refunds or transfer options vary state by state.
|Enrollment open all year.
||Most plans have limited enrollment period.
Source: Smart Saving for College, NASD.
Investors have two types of savings plans to choose from. In direct-sold savings plans, investors buy 529s directly from a given state’s plan, are responsible for their own research and pay no sales charges. This type of plan is good for the cost-conscious, do-it-yourselfer who doesn’t mind taking the time to research which state’s plan is the best fit and is comfortable choosing among the available investment options.
If you do not wish to pick your own investments, you can go through a broker, who will invest your money for you, but at a price. Broker-sold programs can be subject to fees, sales charges and/or annual distribution fees, all of which can cut into your potential gains.
Whether you buy direct or through a broker, college savings plans may offer in-state tax incentives for residents, although not all states do.
Prepaid Tuition Plans
Any college, university, vocational school or other postsecondary education institution is generally eligible to participate in prepaid tuition plans. This type of 529 plan enables college savers to buy credits at participating schools to lock in future tuition prices. Most prepaid tuition plans are sponsored by state governments for residents, and cover tuition and fees only (books and room and board are excluded). They are typically guaranteed by the state backing them.
With prepaid tuition plans, you are not investing in mutual funds—instead, you are making a bet against rising tuition prices. Depending on the state or plan there may some flexibility as to where you can apply your credits, but these types of plans are often optimized for in-state school tuition—for out-of-state or private schools, you may find yourself having to make up the difference between the plan’s assigned value and tuition out of pocket (some private schools do participate in prepaid tuition plans, however).
It should be noted that many of these plans require you to start investing years before your beneficiary is of college age, and they do not guarantee admission to participating schools. If your beneficiary chooses not to attend college or is not accepted, most states have refund options, or the plan can be transferred to another family member. Prepaid plans can be a good fit for some, but they have more strings attached than savings plans and offer less of an opportunity to grow your investment beyond the cost of in-state college tuition.
There are many considerations in finding the best college savings investment plan for you. We recommend consulting with a trusted financial adviser to determine the best fit. Stay tuned for updates in the coming months that delve deeper into individual states’ plans and benefits, and a look at an update to financial aid rules that allow grandparents to put 529 assets to work earlier without impacting their beloved student’s eligibility.
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