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Few take advantage 
of chance to adjust their college savings plans

November 19, 2009


As we dash into the year-end holiday crush, many parents aren't likely to want to sit down and review the investments in the 529 college savings plans for their children.

But after the market meltdown, the Internal Revenue Service issued a special rule for 2009 only that allows investments in 529 plans to be changed twice a year. The old policy was that savers with 529 plans could change their investment strategy once a calendar year and in certain other circumstances, such as a change of beneficiary or a rollover from one state plan to another, according to Mark Kantrowitz , publisher of FinAid.org and FastWeb.com.

Many people either don't know about the two-change option for this year only — or did not want to make such moves.

Terry Stanton , spokesman for the Michigan Department of Treasury , said research indicates that 217 account holders with money invested in the Michigan Education Savings Program took advantage of the twice-a-year rebalance option so far this year.

"With more than 200,000 accounts, this is a very small percentage and accounted for only 4 percent of the total transfers that occurred in 2009," he said.

Unlike a 401(k) plan for retirement, college 529 plans — which are named for a section of the U.S. tax code — have limits on how much shifting around you can do with the money in a given year.

Why would someone want to make a switch now?

Maybe you panicked in the spring and shifted all of the money into a low-rate guaranteed choice in the plan and your child isn't even in kindergarten.

"If someone changed their asset allocation earlier this year because they were worried about the stock market dropping, they might want to take a fresh look at their investment strategy and risk tolerance," Kantrowitz said.

He said the IRS is unlikely to extend the special two-changes-in-a-year rule into 2010.

The brutal bear market — which hit a bottom in March 2009 — may have shone a light on just how much volatility and risk could be packed into some 529 plans.

Strategies for some options offered by specific 529 plans are part of the problem, according to Jason Zweig , author of the newly published "The Little Book of Safe Money" (Wiley, $19.95 .)

The worst of the bunch can "offer irresponsibly risky exposure to stocks and appallingly bad investments that can blow parents' money and students' dreams to smithereens," he writes.

Zweig suggests that by the time a student hits college, less than 20 percent of the money should be at risk in stocks. By contrast, he noted one option for a Utah plan could have left students already in college with 65 percent in stocks.

Investors absolutely must research how their plan is investing the money even with an age-based asset option.

Pay attention to where you put the money, too.

In Michigan , you can go to www.misaves.comv and click on investment options.

With the Michigan plan, investors can choose three types of age-based mixes — conservative, moderate and aggressive.

For students age 12 to 14, for example, no money is in a money market account — one of the least-risky options — in both the moderate and aggressive options. By contrast, 25% of the portfolio is in a money market account at ages 12 to 14 with Michigan's conservative age-based option. So the conservative option has less money at risk.

With the aggressive option in the Michigan plan, no money is in a money market even when the child is 15 to 17 years old.

For many, Kantrowitz said, Michigan's aggressive age-based portfolio could be too aggressive.

The college savings 529 plans often suggest that an age-based option allows a parent to set it and forget it. But should you be setting it and forgetting it?

And remember to keep saving.

"It is difficult to pick a bottom for the market except in hindsight, so it is better to continue making regular monthly contributions to your 529 college savings plan," Kantrowitz said.

 


McClatchy-Tribune Information Services