In my previous article titled, The Better Virginia529 Plan, I stated that “for those individuals who want to utilize the stock and bond markets to try and maximize their college savings, the better plan is the Virginia529 inVEST plan.” I also mentioned that what makes the inVEST plan more appealing than the CollegeAmerica plan is its lower cost. Below we’ll take a more in-depth look at the advantages and disadvantages of both and see how the fee differences might impact one's college savings.
Unlike the other Virginia529 plans, the CollegeAmerica plan is only offered through financial advisors. The main benefit of this plan is the opportunity to invest in a variety of funds offered by American Funds, while working with a financial advisor to build a unique college savings plan. For those who feel that they just don’t have any idea what to do and are willing to pay a little extra to have a financial professional assist them with their investment choices, this might be the plan for you.
Naturally, the financial advisor will need to be paid for his/her services and this is typically accomplished through an up-front sales charge on their 529-A Class shares, (the maximum is currently 5.75%) or through an annual 12b-1 service fee on the 529-C Class shares (which is currently 1.00%). American Funds also provides the opportunity to work with a “fee only” investment adviser through their 529-F-1 Class shares. In any case, American Funds still charges their Annual Management Fees and Other Expenses, which vary from fund to fund.
In contrast, the Virginia529 inVEST plan is setup directly through and managed by Virginia529. And while its investment options named Rappahannock, Conservative Income, and Stock Index don’t sound as diverse and sexy as Capital Income Builder, Washington Mutual Investors Fund and The New Economy Fund, they really have the diversity and flexibility needed for a higher education savings plan. In fact, I would argue that this simplicity is an advantage of the inVEST plan.
529 plans are not really designed for active investors who like to shift their investments frequently. Unlike traditional IRAs and 401(k) plans, 529 plan owners do not have the freedom to make investment direction changes several times a year, as they might wish. They are only able to make up to two investment changes per year. In fact, until late 2014, investors were only able to change their investment options once per year. While there are ways to get around the maximum change restriction, it is typically not in the investor's best interest to do so. That said, it becomes more difficult to justify the commissions paid to the financial advisor when the plan itself doesn't allow much freedom for "management."
The inVEST plan currently offers 21 different investment options to choose from, including age-based portfolios, actively managed static portfolios, (which will maintain a target asset allocation) and passively managed static portfolios. With a total asset-based expense ratios ranging from 0.19% - 0.82%, the overall fees are lower than most direct sold 529 plans. Compared to the advisor-sold CollegeAmerica plan, the lower fees can make a big difference in your overall return.
Let’s take a look at a hypothetical example of an investment in the CollegeAmerica plan versus an investment in the inVEST plan. For this example, we will invest a lump sum of $50,000 with 60% of our funds in the equity markets and 40% in fixed income assets like bonds. In the inVEST plan, we put 60% into the Stock Index and 40% into the Bond Index. (simple enough!) In the CollegeAmerica plan we do the same weightings in the popular Growth Fund of America and the Bond Fund of America. Below is how your investment would have performed.
Return calculations are Net of fees, as of August 31, 2015. Source: Morningstar, American Funds and Virginia529.
One important thing to note is that this quick example is just the growth of a single $50,000 investment, compounded 3, 5 & 10 years. In reality though, a college savings plan typically starts with a reasonable investment in the first year, followed by subsequent investments until the child begins college. For instance, let's assume one pays $2,000 to open an account and invests another $2,000 annually over the next 17 years. If the investor pays a 5.75% front-end load fee and achieves a 6% compounded annual return, he/she would have paid $2,070 in load fees over the 18 years and have $58,257 at the end of the 18th year. Had the investor not paid any load fees, he/she would instead have a total of $61,811. (a $3,554 or 6.10% difference)
While I think that both plans provide competitive solutions for college savings, I prefer the inVEST plan over the CollegeAmerica plan due to the simplicity of the available investments, combined with their performance relative to fees. In full disclosure I currently have both plans for each of my two children, but I stopped funding their CollegeAmerica plan a few years ago. All new investment funds have been going to their inVEST accounts.
Kevin Warman, CIMA®, RMA®
(last updated 10/07/2015)