Credit: Source: Vanguard.Though each option follows a different path, they all end up at roughly the same place. Once the beneficiary reaches college age, all three portfolios have 100% of their assets in bonds and/or cash equivalents. The plans thus operate in a similar fashion as a target-date retirement fund , which slowly shifts toward safer investments as an investor reaches retirement age. The best part is that it's all automatic.
For all the convenience of automatic rebalancing, investors pay very little in fees and expenses. All of Vanguard's age-based options carry an annual expense ratio of just 0.17% of assets, the lowest of any of its investment options in its 529 plans.
4. You can pick your own portfolios
Investors who would prefer to take a more direct role in allocating their investments can pick between 19 different portfolios that offer varying exposure to stocks, bonds, and cash.
Popular choices include an S&P 500 Portfolio, which tracks the performance of the S&P 500 Index for a small fee of 0.19% annually. Likewise, for the same price, one can invest in the Total Stock Market portfolio, which invests in virtually every stock listed on U.S. stock exchanges.
By charging higher fees, Vanguard seems to dissuade investors from making their own investment choices. Notably, the age-based options carry a fee of just 0.17% of assets, but those who do their own picking will pay anywhere from 0.17% for low-fee portfolios all the way up to 0.45% for the Morgan Growth Portfolio, which is based on the actively managed Vanguard Morgan Growth Fund . As a general rule of thumb, actively managed funds are much more expensive than index funds.
Vanguard allows up to five total investment choices. Thus, one could theoretically invest 80% of their contributions into a conservative age-based portfolio, and dial up the potential risk and return by investing the remaining 20% in its Growth Index Portfolio, for example.
5. Vanguard balances cost and convenience
Vanguard's 529 compares well to 529 plans offered by other brokerages. The table below compares the minimum investments and annual expense ratios on investments you can buy in 529 plans housed at Vanguard, Fidelity, and Charles Schwab .
Sources: Vanguard, Fidelity, and Charles Schwab. Note: Fidelity also manages the Massachusetts 529 plan.
Ultimately, the decision on where to save for college expenses depends primarily on whether your state allows you to deduct contributions to 529 plans sponsored by another state. Expense ratios are a much smaller concern, as a 529 plan with a $10,000 balance would incur just $11 in annual fees at Fidelity vs. $17 at Vanguard and $30 at Charles Schwab, relatively insignificant differences that can be offset by the convenience of keeping a 529 at the same company as your IRA or 401K plan.
All in all, Vanguard's age-based 529 portfolios are a very attractive choice that balances the low fees and expenses of index funds with the convenience of automatic rebalancing as your loved one reaches college age.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
