The following is in response to our article, The Misguided Promise of 529 Plans, which appeared last week:
Dear Editor,
I enjoy your various articles. You clearly summarize current writings and research.
However, your analysis of 529 plans is misguided. The returns of 529 plans generally mirror the "market." You are correct to expect 529 plans to have average market returns. While college costs are rising at double the rate of inflation, your alternative is muni bonds, which lock in a much lower rate of return. That is guaranteed to fail.
A better investment alternative is to find a manager who has consistently outperformed the market. Comparing to the "market" is to be satisfied with grade-C performance. In every endeavor we look for the best performers. Professional sports teams do not recruit average players. Ivy League schools do not admit average students. The same should be true of insisting on investments managed by the "A" managers.
The conclusions in the article would be much different if you did not compare overall 529 plan performance to mediocre equity performance. The public may not have the sophistication to find great managers. Your audience of financial advisors, however, should be adding value by delivering above average returns for their clients. Otherwise, who needs them?
The investment choices offered by 529 plans are not great. If one is to invest outside the 529, munis may not be best choice either. They are a good choice for someone who does not know what to do. Your audience of advisors should do better than that.
My firm offers actively-managed equity portfolios whose performance speaks for itself. If, for example, you have a manager with GIPS-compliant returns of 8% for 10 years and 11% for 15 years, it would be superior to the 3.5% yield on zero-coupon munis described in your article. More than one equity manager has out-performed the "market." With a little effort, advisors can find managers that have consistent superior performance.
This discussion applies to younger children. Anyone with an investment horizon under two years should seek other strategies.
Herbert S. Schechter CPA
Managing Director
Minneapolis Portfolio Management Group, LLC (MPMG)
Minneapolis, MN
