529 Plans: Assessing the Stable Value Option

The number of 529 plan participants who view stable value as an attractive college savings tool will only continue to grow.

Should your 529 plan offer a principal-preservation investment option to plan participants?

Almost certainly.

Should that option be a stable value fund?

Again, almost certainly.

For years, many 529 plans offered money market funds as their conservative investment option. Now, they’re increasingly replacing them with stable value funds. At least 35 of the nation’s 102 plans currently include a stable value fund on their investment menu.1 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.

This trend prompts two important questions. First, why are so many states adding stable value funds to their 529 plans? And second, why are more than half still without them?

The answer to the first question is actually fairly simple: Stable value funds historically have delivered significantly higher returns than money market funds (their most common competitor), with little to no added volatility, as shown in Figure 2. And during the extended period following the 2008 financial crisis, when most money market funds were offering 0 percent returns, stable value funds looked all the more attractive. (Money market funds seek to earn interest for investors while maintaining a consistent net asset value of $1 per share, although that value is not guaranteed and can fluctuate. Money market funds generally invest in a diversified portfolio of high-quality, short-term securities.) The second question is a bit more complicated. Its answer revolves primarily around a lack of familiarity with the asset class on the part of some plan administrators, along with concerns about perceived challenges that, in the end, actually help account for stable value’s unique appeal to many plan participants.

 

1 College Savings Plans Network website, March 2018.

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