How to save for college and make a difference, too
Saving for college in a way that minimizes taxes and endeavors to make the world a better place is becoming easier to do.Skip to next paragraph
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To spark more saving for education, Congress in August made permanent the federal tax benefits of investing through 529 savings plans, which operate like an individual retirement account for education-related expenses. Knowing their 529 savings now won't face a federal tax hit upon withdrawal, Americans have increased their 529 plan investing by about 10 percent over the past five months for a total of more than $90 billion.
What's more, a few of the nation's state-based 529 plans are modifying their options to sweeten the deal for ethically motivated investors, whether they live in state or not. For example:
•In November, Pennsylvania introduced a relatively low-cost option, the Vanguard FTSE Social Index Fund, where the annual charge is 0.75 percent of assets under management. The state also dropped its minimum initial investment threshold from $1,000 to $25.
•Also in November, California signed up Fidelity Investments to manage its Social Choice Fund, which provides extra weighting for the most financially promising stocks within a socially screened index.
•Before July 1, Missouri plans to roll out a 529 option for the Roosevelt Anti- Terror Multi-Cap Fund, which shuns firms that do business in four nations that the State Department has linked to terrorism: Iran, Syria, Sudan, and North Korea.
Observers say states are improving their ethically screened options in part to attract more capital to their 529 programs.
"If a state program has a sufficient base of assets, it will be able to offer a more competitive fee" to encourage more saving for education, says Jacqueline Williams, chair of the College Savings Plans Network, which includes all state 529 programs. "As these 529 plans become more and more mature, you might see more of these kinds of developments [such as ethically screened products] as states try to differentiate their own product offerings to provide something unique."
But some financial advisers are skeptical of 529 options targeted at ethical investors. Allan Roth, a financial planner in Colorado Springs, Colo., warns that the Roosevelt Fund has a minuscule $14 million under management and drives up trading costs with an 86 percent annual turnover of its stocks. It also flunks a litmus test for many socially responsible investors by keeping tobacco giant Altria as its third-largest holding.
More broadly, he says that, as a rule, 529 investors pay premium fees to access ethical investments that tend to lag behind their competition in performance.
"They're going to pay more and take on additional risk" by limiting their universe of potential investments to ethically screened 529 funds, Mr. Roth says. "So the judgment they have to make ... is whether it's worth the cost to invest in such a style."
The popularity of 529s has grown since the first one made its debut in Michigan in 1988. The appeal stems in part from their flexibility. Savers can invest either in their state of residency, which triggers tax advantages in about half the states, or in another state, which may offer lower fees.