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State college plan gets good marks

Updated: May 3, 2013 12:14PM



Originally published: July 10, 2003

Bright Start is off to a bright start. In spite of the stock market decline that began just as the Illinois 529 college investing plan was launched in April, 2000, the performance of the equity funds within the plan has been well above average.

That’s the conclusion of an analysis done by Chicago-based Morningstar, which tracks performance within the 38 different state college savings plans, known as 529 plans. These plans allow money invested for college to grow completely tax-free, if the withdrawals are used to pay any college expense, including room and board.

Illinois ranks in the top 20 percent for the 12 months ended May 31 for its investments in the most aggressive equity-based fund. For the past 12 months, the fund lost only 3.54 percent, while many other state funds posted loses well over 9 percent. And investments in the Bright Start plan since Jan. 1 have posed a 14.5 percent gain.

Age-based performance

The fund performance being measured is the “age-based” fund, which is invested in equity funds chosen by the state for the youngest participants.Those children, under 6 years old, are presumed to have a higher risk tolerance because of their longer-term horizon before the funds will be need. Each state’s plan is slightly different, but the comparisons were made between the most aggressive equity alternatives in each state’s plan.

Dan McNeela, the Morningstar analyst who conducted the survey, notes that the state changed some of the underlying funds a year ago. He points out that Citigroup, the Bright Start manager, replaced the Smith Barney Large Cap Value Fund with the Salomon Brothers Investors Value Fund, which ranked in the top 10 percent of Morninstar’s large-cap value category last year. In various proportions, this and other funds combine to form the one “equity fund” alternative within the plan.

Says McNeela: “Overall the performance has been far better than average, and, while the time period is still relatively short, it is encouraging to investors that the funds have done so well.”

Does that mean all Bright Start investments should be made in the equity (stock) fund alternative?

Not necessarily. The age-based funds are popular because they separate the investment decision making process from the process of setting money aside for this important purpose. As the child gets older, a greater proportion of the money is automatically shifted into more conservative investments, such as bonds or bank certificates of deposit.

But if you’d like to be even more conservative than the state’s money managers, you can make your own allocations within the plan. And since you can change your investment choices once a year, you’re never stuck with your original decisions.

There is a short-term bond portfolio, currently yielding 2.43 percent annually. And there’s a portfolio that consists of half bonds, and half bank CDs. It currently pays 2.87 percent. And there’s a “stable value” fund called Principal Protection, which now pays 2.99 percent--a rate that changes every 3 months.

If your child is already in high school and you can’t stand the thought of another volatile stock market decline decimating your college savings fund, you can always opt to put more of your savings into those conservative choices.

But don’t give up on continuing your regular monthly investments in Bright Start. Each new check will automatically be allocated among the investment choices you have indicated.

The real advantage, of course, is that all the gains--whether the bit-by-bit additions of safe, but low-yielding conservative funds, or the potentially larger gains from the equity funds--come out completely tax free when the money is used to pay for any college expense, including room and board.

For more information

To get more information on Bright Start, go to www.BrightStartSavings.com or call (877) 432-7444.

By now we’ve all learned that when it comes to investing, there’s no sure thing. But one thing is sure: College costs will continue to rise. So whatever your investment choices within the Bright Start plan, keep setting money aside. That tax-free withdrawal feature makes this choice an easy one. And that’s The Savage Truth.

Terry Savage is a registered investment adviser and is on the board of directors of the Chicago Mercantile Exchange and McDonald’s Corp. She appears weekly on WMAQ-Channel 5’s 4:30 p.m. newscast.



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