Why are an increasing number of states making stable value the conservative investment option in their 529 plans?
For years, many 529 plans offered money market funds as their conservative investment option. Now, they’re increasingly replacing them with stable value funds, investment vehicles wrapped in insurance contracts that guarantee a specific minimum return. A new white paper from Prudential Financial, Inc., "529 Plans: Assessing the Stable Value Option", examines why.
Plans in 26 states currently include a stable value fund. Among the recent converts are Iowa’s College Savings Iowa plan and Connecticut’s CHET Advisor plan, both of which jettisoned money market funds in favor of stable value offerings in 2017. Indiana’s CollegeChoice 529 Direct Savings Plan made the same change to stable value in late 2016.
The growing interest in stable value may be explained by the fact that some administrators of 529 plans are familiar with its use in state-sponsored 403(b) and 457 retirement savings plans. Stable value funds have been highly popular for decades in the defined contribution retirement plan market, where they account for more than $700 billion in total retirement plan assets.
With their relatively short investment horizons, many participants in 529 plans place a premium on protecting their principal. At the same time, they appreciate seeing their account grow in value. Stable value addresses these twin priorities with:
- Book-value guarantees that help assure access to principal and accumulated interest, regardless of financial market conditions
- Crediting-rate formulas that can smooth out the impact of market volatility on investment returns
- Returns that historically have outperformed those of the most common conservative investment option, money market funds, helping put 529 plan participants closer to achieving their investment goals
As 529 plans become increasingly popular, many plan administrators may find adding a stable value option to their investment lineup a competitive necessity—especially in the wake of recent tax law changes.
Under the Tax Cuts and Jobs Act of 2017, qualified uses for 529 plan assets have been expanded to include not just postsecondary education but also qualified K-12 expenses—up to $10,000 per year. With that change, some parents may find themselves tapping their 529 assets sooner than anticipated. If so, their keen focus on principal guarantees—and the appeal of stable value funds—may only be heightened.
The Prudential Insurance Company of America, Newark, NJ.
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This is being provided for informational or educational purposes only and does not take into account the investment objectives or financial situation of any client or prospective clients. The information is not intended as investment advice and is not a recommendation about managing or investing your retirement savings. Clients seeking information regarding their particular investment needs should contact a financial professional.
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