EdVest Still Great for College Savings

By Bob Moeller
WEAC Member Benefits

February 2004

Financial Planning Seminars
Achieving Financial Independence

As most of you know, Strong Mutual Funds – along with a few other mutual fund families – were under severe criticism in 2003 for essentially betraying their fiduciary requirements to do best for the fund holders. Unfortunately, Strong Funds were the funds selected by the State of Wisconsin to administer the Section 529 college savings program. Many members were in a quandary about what to do.

In mid-December, the state named new mutual funds that could be selected in addition to Strong Funds. It is time to review the EdVest program and give some recommendations as to which funds you should select at which times.

First, the concept is a great one. You can put away funds in a Section 529 program to be used for college. You retain control and ownership of the funds and name a beneficiary who presumably will use those funds for college. You can change that beneficiary at any time. So, if one child does not go to college, you just change the beneficiary to another child or even to yourself if you can use the funds for college.
The funds are invested in mutual funds, and any growth or interest is not taxed. When the funds are withdrawn and used for college, there are no state or federal taxes to pay.

The State of Wisconsin has enhanced the appeal of EdVest by allowing parents or grandparents to deduct up to $3,000 per child per year on their state income tax returns. The funds essentially can be used at any college in any state. You could use another state’s program, but you would lose the Wisconsin tax deduction. There is no requirement that the funds remain invested for any period of time before use. You can put funds in on December 15, get your tax deduction for 2004, and withdraw the funds on January 1 to pay for tuition.

It used to be, under the old Strong Funds plan, that you chose a program for the investments, such as “aggressive,” etc., and Strong chose the funds. Under the new arrangement, you can still do that, but better, you can design your own investments. And, your design is much simplified by the fact that two very good Vanguard funds are included, with good long-term records and low management fees. Those two funds are the Vanguard 500 Index Fund (i.e. the 500 largest companies), with fees based on institutional rates of only 0.05% per year, and the Vanguard Wellington Fund, a fund of roughly 60% stock holdings and 40% bond-type holdings, with fees of 0.36%. Wellington is one of the very oldest “balanced” funds in existence and has a good record. To the fund fees, you have to add the EdVest fees of 0.35% to 0.45%. Finally, the program now features a “stable value” option, which essentially guarantees you a % earnings with no down-side risk. This is what you’ll want to use when the child is actually in college.

Following is how I suggest you invest the funds. You’ll note that I am ignoring the other funds and particularly ignoring any Strong funds, because the Vanguard funds chosen are good ones with low fees. If you want to look at the other options, fine. Note also that Strong is still the administrator for the plan.

Use the following guidelines for investments. You’ll want to talk to the plan representative to make sure you can get the changes you want during the time period. Sometimes it may be easier if they just set up two different accounts for you.

• If the child is more than 10 years from starting college, invest 100% in the Vanguard Index Fund.
  
• From 10 to five years before college starts, work down to 50% index and 50% Wellington over those years.
  
• From five years before college starts until the start of college, allocate down 10% per year in index and up 10% a year in stable value.
  

Make the changes gradually over the years, so that when college starts you have at least 50% in stable value and the balance in Wellington. By the end of the second year of college, have at least 80% in stable value.

If you are already involved in EdVest, using the Strong Funds allocations, I recommend that you shift out of Strong and into some allocation similar to that stated above. Just as an example, the Strong “aggressive” portfolio carries total expenses of 1.35% per year as compared to the Vanguard Index Fund total of 0.50% and Wellington’s 0.81%. And, of course, it should be remembered that Strong betrayed your trust in the past.

Posted February 3, 2004