Exploding 529 plans

Last month, we wrote about how many target-date mutual funds failed to protect those with short investing time frames last year. For those assuming they were invested conservatively based on the fact that their target date was only a year or two away, it was a cruel realization indeed to find losses of 20%, 30%, or even more.

In a similar vein, it turns out that some college saving 529 plans posted awful returns last year, even for those investors who were very close to college age. Most 529 plans allow investors to select an age-based investment track that is supposed to automatically get more conservative as the student approaches college age. Sadly, there's significant variation between plans as to how these allocation percentages shift, as well as the underlying funds they are invested in.

Thankfully, it appears that most of those who followed SMI's advice on selecting a good 529 plan would have steered clear of the worst disasters. Those most at risk would likely have been those who were enticed by generous matching provisions or other offers by their home state plan (if that plan turned out to be one of the offenders). Beyond that, a focus on the plan asset allocation options would have been healthy, and I suspect that those who went with plans featuring low-cost index funds avoided the worst of the damage.

Both the 529 and Target-date fund issues are a good reminder of a crucial investing fact: Nobody cares about your money as much as you do - so make sure you understand what you're investing in.

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Mark Biller is Sound Mind Investing's Executive Editor. Visit www.soundmindinvesting.com to learn more.