Putnam rolls out new 529 plan, includes first absolute return plan for college savers

Putnam rolls out new 529 college savings plan

Putnam Investments said Friday it is offering a new 529 college savings plan that includes the choice of an absolute return mutual fund. It’s the first college savings plan to include these investment funds designed to generate returns above the level of inflation over a 3-year period.

529 plans are an important tool for college savings because investors can withdraw money for college expenses free of federal taxes. They function much like a 401(k) account where the accountholder can select from a range of investment options.

The Boston-based mutual fund provider said its Putnam 529 for America is an advisor-sold plan that will offer, in addition to the absolute return funds, age-based plans that become more conservative as the child approaches college age. Goal-based plans, which keep the same mix of stocks, bonds and other investments regardless of the child’s age, will also be available.

Individuals also may choose to select their own investments from 11 stock, bond and cash funds.

Although it’s part of the Nevada state 529 offerings, families anywhere in the U.S. can buy into the plan.

As an incentive, Putnam said it will waive sales charges for participants rolling over balances from existing 529 plans. What’s more, the annual maintenance fees will be waived until 2012.

Putnam has had success with its absolute return funds for retirement. The funds are 18 months old and have already attracted $2.5 billion. Investors are drawn to their purported relative safety.

Absolute return funds reduce volatility by assembling a portfolio mixed with more conventional stocks or bonds; and alternative investments including options, futures, currency hedges or “short” bets that certain stocks will lose value. The idea is that when one side of the portfolio lags, the other side is designed to counterbalance any losses, keeping the performance ahead of more traditional funds.

It’s important to note, however, that these funds are new. Investors should know what they’re buying and that the funds are not totally proven yet, said Laura Lutton, a Morningstar Inc. analyst.

It’s also important to note that actively managed mutual funds charge higher fees. The absolute return funds also are sold through a broker, further increasing the up-front cost to the investor, she said.

Putnam CEO Robert Reynolds said the success of Putnam’s absolute return funds show investor’s believe in the concept and are willing to buy. That prompted the company to roll them out to families as part of Putnam’s college savings options.

“With the cost of a college education having risen several times faster than the rate of inflation in recent decades, saving for college is already one of the biggest financial challenges families face,” Reynolds said.

College loan leader Sallie Mae says more than half of parents keep some or all of their children’s college savings in bank accounts, money market accounts or certificates of deposit. While safe, those options do not offer the tax savings of 529s and provide little growth opportunity.