Fidelity introduces FDIC-insured college savings option, Vanguard cuts Nevada 529 plan fees

College savings providers expand options, cut fees

BOSTON — One of the nation’s biggest providers of 529 college savings accounts is trying to entice investors seeking more conservative savings options, and a rival is cutting fees by nearly half on one of its biggest 529 plans.

Fidelity Investments said Tuesday it’s adding a new 529 plan, an interest-bearing bank deposit option that is FDIC-insured against losses. That’s an attractive option for families concerned about investment losses from a 529 primarily holding stocks or bonds.

Separately, Vanguard is cutting annual investment fees by nearly half for its plan offered through the state of Nevada, which is open to investors nationwide and is among the largest 529s with $4.5 billion in assets.

The industry estimates about half of parents keep some or all of their children’s college savings in bank accounts, missing the tax savings from 529s, because they fear investment losses. Historically, stock and bond assets have produced greater long-term returns than bank accounts. But investor thinking changed after 2008, when stock indexes slid nearly 40 percent, and many bond investors also suffered losses. A study by the research firm Savingforcollege.com found nearly nine out of 10 529 plan portfolios suffered losses in 2008. Many parents hadn’t known or chose to ignore that their college savings were so exposed to stock market losses.

Fidelity’s new bank deposit option expands choices that range from 529 portfolios that mainly hold mutual funds investing in stocks, to more conservative options emphasizing bonds and money-market investments. It’s available to investors nationwide in each of the five 529 plans that the Boston-based company manages in Arizona, California, Delaware, Massachusetts and New Hampshire. The portfolio will earn an interest rate that’s indexed to the federal funds rate, which is currently near zero, but could rise if the economic recovery regains momentum.

Parents choosing Fidelity’s new 529 option would gain tax benefits compared with those stashing college savings in regular bank accounts or certificates of deposit. That’s because the 529 plans allow money to be withdrawn for college expenses free of federal taxes. Each plan is sponsored by a state which can set its own guidelines. About two-thirds of the states also offer state tax deductions or credits to residents.

The federally insured options “marry 529s’ tax benefits with the safety of FDIC-insured accounts,” said Andrea Feirstein, a managing director at AKF Consulting Group, an adviser to 529 plans which hold about $118 billion in assets.

Fidelity’s introduction of an FDIC-insured 529 follows similar federal-insured options that have recently become available through plans in Colorado, Indiana, North Carolina, and Virginia, according to AKF Consulting.

Whether parents latch onto the new federally insured 529 options depends in part on stock performance in the next few years, and how long it might be before stock investors recover all the ground they lost in 2008 and early 2009.

“It wasn’t just parents whose children were 5 years old who lost money,” Feirstein said. “It was people with 18-year-olds, who didn’t have time to recover those losses before they entered college.”

Memories of 2008 are still so fresh that many investors are likely to embrace federally-insured 529s, even if it means they miss stock gains, said Laura Lutton of investment researcher Morningstar, which tracks 529 plans.

529 plans, which bear the name of the federal tax code that created, also have seen a string of recent fee cut announcements like Tuesday’s move by Vanguard.

Beginning Oct. 15, investors in Vanguard plan’s three age-based options in Nevada will pay $2.50 per year for every $1,000 invested, compared with the previous $4.40. Investors in the Nevada plan’s 19 individual portfolios from Vanguard will see costs shrink to a range of $2.50 to $5.50 for every $1,000.

So-called aged-based 529 portfolios reduce stock market risk over time, automatically adjusting to a more conservative investment mix the closer a child is to college.

Vanguard estimates more than 100,000 clients will benefit, with $8.5 million in annual savings.

Vanguard recently made similar cuts at 529 plans it runs in New York and Iowa. Fidelity and T. Rowe Price are among other major 529s providers that also have cut fees this year.

The trend is likely to continue, Lutton said, “and that’s a great benefit because that is more dollars in your nest egg you get to keep.”

Still, the plans on average charge higher expenses than comparable mutual funds, which typically can handle recordkeeping duties and process investor withdrawals more efficiently than more complex 529 plans.