Opening a College Savings Plan? Know the Options

Opening an Account

From the get-go, opening a 529 plan can feel like an overwhelming task because of the sheer number of options.

Nearly all states offer their own 529 plans and families aren't restricted to picking one from home. As a result, inexperienced investors may feel they need the guidance of an adviser to sort through the many options. The problem is that adviser-sold plans usually charge commissions of 5% to 6% of the contribution. For a $5,000 contribution, that's $250 to $300.

But fees can be avoided by opening an account directly through an investment firm or the state plan administrator.

Since more than half of states offer tax breaks for residents, the selection process may be fairly simple for many families, notes Joe Hurley, a certified public accountant and founder of SavingforCollege.com.

"It's the most straightforward option to stick with what's offered in state if there are incentives," Hurley said.

Families with a 401(k) or other retirement account may want to check with their plan's administrator to review its menu of 529 plans. If they're happy with service on their retirement fund, Hurley says it might be most convenient to keep all their accounts in one place. Otherwise, investors striking out on their own can check the performance and details of various plans on sites such as SavingforCollege.com and Morningstar.com.

After settling on a plan, it's also worth considering whether to set up automatic contributions to avoid neglecting the account.

Setting the Investment Mix

Families often feel more comfortable opting for an age-based 529 plan, which relieves them of having to tinker with the mix of investments as the child gets older. A little more than half of 529 accounts are age-based plans, according to the Financial Research Corp.

Age-based plans also usually offer conservative, moderate and aggressive options to reflect the investor's tolerance for risk. But don't sign off on an option without reviewing the specifics; the mix of assets in plans can vary significantly and you might find that you're more conservative than you thought.

For example, the aggressive option for Vanguard's age-based plan for 11- to 15-year-olds invests half the money in the stock market. But families with children on the older end of that spectrum might feel more comfortable with the "moderate" option, which allocates just 25% to stocks.

The decision on how aggressive you want to be may be affected by current market conditions as well.

Many families with younger children are moving more heavily into stocks to take advantage of recent market declines, said Joan Marshall, executive director of the College Savings Plans of Maryland.

On the other hand, those who got a late start in saving and have children closer to freshman year might want to consider options that protect contributions. These plans may be called "principal protection," ''stable value" or "guaranteed option" funds.