Savingforcollege.com Study: After-tax Performance of 529 Plans Beats the Indexes

News provided by

Saving For College LLC

May 02, 2014, 05:00 ET


Pittsford, New York (PRWEB) May 02, 2014 -- In a new study, Savingforcollege.com compared the historical investment performance of state-sponsored 529 college-savings plans to broad market indexes and found that in nearly every category the average 529-plan returns trailed the comparable index returns.

However, in many of the performance categories employed for this study, the gap between average 529-plan returns and index returns was slight. Furthermore, Savingforcollege.com's analysis showed that 529 plans beat the indexes when results were adjusted for the federal income-tax benefits of 529 plans.

Investment performance was compared over one-, three-, five-, and ten-year periods ending December 31, 2013 in each of seven different asset-allocation categories ranging from 100% Equity to 100% Short-Term. The median 529 performance in each category was used to represent the average, and as many as 222 separate portfolios were examined per category.

The broad market indexes used as benchmarks consisted of the Russell® 3000 Index, MSCI EAFE Index, Barclays Capital U.S. Aggregate Bond Index, and Citigroup 3-Month U.S. Treasury Bill Index.

For example, the median 5-year average annual return for a 529-plan portfolio invested 100% in equities was 16.98%, while the benchmark—an 80/20 blend of the Russell® 3000 Index and the MSCI EAFE Index—returned 17.56% over the same period. However, when the annualized return of the benchmark was assessed a 15% federal capital-gains tax, it fell to 14.93%, or more than two percentage points below the annualized return of the tax-free 529-plan.

"Our study suggests that 529-plan managers have done a good-job investing the college savings entrusted to them," said Joseph Hurley, founder of Savingforcollege.com. "It also underscores the importance of keeping fees in 529 plans low, since the benchmark returns assume zero costs."

For more details and analysis: go to http://www.savingforcollege.com/articles/benchmarking-the-529-industry.

Marie Osypian, Saving For College LLC, http://www.savingforcollege.com, +1 (585) 286-5426 Ext: 114, [email protected]