Losing any investment is tough. Losing funds intended for a child’s education, though, is as bad as it gets. At the height of the market’s free fall in 2008, an estimated 90 percent of the college-savings accounts known as 529 plans suffered losses, with some shedding more than 40 percent. Now the skittishness of burned investors and ongoing market volatility have led to increased competition in the 529 space, with providers announcing new products, added features, and reduced costs. One strategy is to offer more conservative options. Fidelity Investments recently announced the addition of a “bank deposit portfolio” across its five direct-sold 529 college-savings plans, including those it manages in New Hampshire, California, Massachusetts, Delaware, and Arizona, made up of a deposit into an interest-bearing account designed to preserve principal. In recent months, plans from Vanguard and the State of New York have reduced expense ratios by half, and T. Rowe Price said it would cut fees by a third.
With the cost of a college education rising several times faster than the rate of inflation, “saving for college is already one of the biggest financial challenges families face,” says Bob Reynolds, CEO of Putnam Investments, which has introduced a 529 plan that’s designed to outperform inflation over three-year periods. “With two major downturns within a decade, investors today are much more sensitive to the fact that volatility is not your friend.”