Op-ed: Your child got accepted to college — now protect their 529 plan savings

I’m a financial advisor. So, I know a thing or two about saving and investing. But I’m also a dad with a college-aged son, and I am starting to see that, now more than ever, I need financial knowledge to help in that role. Saving for college has gotten personal.

My eldest son entered his freshman year of college last fall. As a prudent saver, I put away money early and regularly over the past decade in a college 529 savings program in my state, Maryland, to help fund my son’s education.

For those who don’t know much about this type of account, which is usually administered by the state where you live, there are two good reasons parents use them. The first is the potential for a small tax break on your deposits. But more important, any growth in the investment is tax-free when used for qualifying college expenses.

There is another wrinkle that saving parents need to consider: How much risk do you want to embrace when the money is invested? Spoiler alert: You, like me, might be shocked to realize that the money you put aside for your children may be at greater risk than you thought.

A typical strategy for parents is to choose the “set-it-and-forget-it strategy” of an age-based target date fund for their 529 investments. Generally, this approach starts with aggressive investments, mostly stocks, when the child is young and the money isn’t needed until well in the future.

Then, as the child nears college, the plan gets more conservative, with more bonds and cash. You can make a change yourself up to twice per year, but if you don’t, your plan administrator reallocates your account into less risky investments as the child gets older and closer to college.

What has surprised many parents, myself included, recently is the volatility of the “in-college” plans — those with the most conservative investments for college-age students.

When a child has reached college age, these accounts should be in capital-protection mode. After all, withdrawals from the account may have begun and have a short and finite life when the child is in college. Unlike retirement, which can start at an undetermined date in the future and last for life, most college expenses start around age 18 and last four years.

But that’s when I got my wake-up call.

When I saw the performance of Maryland’s in-college allocation for its age-based plan, I was surprised to see a 7.25% loss for 2022. Put another way: The money we had put aside for my son was declining even though it should have been invested conservatively.

It made me wonder just how other states allocated their in-college plans.

What I found was wide and varied. Thankfully, some states — including the worst performers (Missouri, Iowa and North Carolina), which lost almost 14% — had labels like “aggressive” or “growth” on their plans.

These same states typically have several age-based plans from which to choose, and their conservative versions did far better. The average loss in 2022 for all “in-college” plans was 6.44%.

Other states took a more conservative approach. For example, New York uses a glide path with three different allocations from which to choose, and the state’s conservative track actually gained 1.56% for the year.

In fairness, 2022 was an awful year for both stocks and bonds. In fact, it was the worst year in decades for a balanced approach. Taking more risk could have worked in a different market environment but not last year.

However, I hope 529 plan sponsors take heed of the volatility experienced by those who are ready to use the funds. Of course, things may be different now that interest rates are higher, and stable value funds can provide some yield with less volatility.

The key takeaway for parents is this: Keep an eye on how your plan operates and, when necessary, lower the risk in your plan as your children approach college age.

So, if an ‘in-college’ conservative allocation can lose money, are there some other myths that I often discuss with clients? Absolutely.

For example, you don’t have to use your own state’s plan to save. While you may lose a small tax deduction on contributions, there may be other, less expensive plans out there.

Next, if your child doesn’t go to college, you don’t lose the money. You may change beneficiaries to a qualified list, or if necessary, withdraw the funds. You may owe a penalty and/or tax on the gains, but if you really need the funds, you may have access.

Last, 529 plan savings can be used for more than just tuition. You may use the funds for books, room and board, and computer technology.

As a dad and financial advisor, I plan to stay with the age-based plan for my younger, second son. But I may consider switching to a stable value fund to minimize volatility when we prepare for our first tuition payments.

—  By Barry Glassman, a certified financial planner and president of Glassman Wealth Services. He also a member of the CNBC FA Council.