529 Conference 2016: Conservative Investment Strategies

By Paul Curley | paul.curley@strategic-i.com | November 4, 2016

What are the trends in the typical spectrum of conservative investment options used in 529 plans?

Due to daylight savings time over the weekend, hope you were able to enjoy the fall weather and came back to work today fully energized and ready to read the 100th issue of the 529 Dash e-newsletter. The 529 Conference 2016 at the JW Marriott Grande Lakes in Orlando featured a session titled, “Conservative Investment Strategies.” This was the fourth year in a row that the annual event highlighted an investment panel, but it was the first time that it focused on a theme such as conservative investment strategies. This year’s panel was moderated by Kay Ceserani, Managing Director with Pension Consulting Alliance and included the three panelists of Leo Acheson, Senior Analyst, Multi-Asset Strategies, Manager Research, Morningstar, Jim Diskin, Director, Stable Value, Prudential Retirement and Tiffany Spudich, Director, Client Relations, Capital Cities. This week’s article highlights a summary of their responses to the questions on trends in the typical spectrum of conservative options, the ripple effect of money market reform, the resurgence of stable value and Morningstar’s view on conservative options. This week’s article will provide market sizing, data, and insight from the panel discussion to help you grow and protect your book of business.

Market Sizing: Based on data analysis by Strategic Insight, 53% of 529 college savings plan industry assets are managed within age-based investment options, while 19% are within static asset allocation investment options and 28% are within individual investment options as of 2Q 2016. Many 529 plans offer aggressive, moderate and conservative target-risk tracks within age-based glide paths. Additionally for individual investments, 3.8% of 529 savings plan industry assets are invested in conservative standalone investment options as of 2015. Of the 3.8%, 2.2% were in money market funds, 1.1% were in stable value investment options and 0.5% were in FDIC-insured investment options. Read the panel overview below to learn more about the investment options within 529 college savings plans.

Select Panel Topics of Discussion:

—Trends in the typical spectrum of conservative options. First, Tiffany Spudich, Director of Client Relations with Capital Cities, commented that there has been a focus on conservative investment strategies within the 529 industry given the increase in market volatility and the money market reform in 2016. Effective October 14, 2016, the SEC issued money market reform to increase transparency and investor protection. She also gave an overview of the product by noting that conservative investment options generally seek to provide capital preservation and will typically demonstrate less volatility with downside protection, but with a lower expected return. Additionally, the role of the product is to provide a low-risk option for 529 account owners who have a conservative risk profile or shorter time horizon. These investment options are featured in both pre-diversified portfolios and individual investment options. Within individual investment options, three commonly used conservative options include money market funds, stable value and short-term fixed income options with each having benefits and considerations in their usage. In closing, conservative investors demand these types of investment options, product providers are adjusting their investment line-ups to align with the changing market and investors should know the different investment types and how they typically perform in different market environments.

—The ripple effect of money market reform, and the resurgence of stable value. Second, Jim Diskin, Director of Stable Value with Prudential Retirement commented on the ripple effect of money market reform and the resurgence of stable value. First, money market reform has created net outflows from prime money market funds to other types of conservative investment strategies. Therefore, money is in motion from prime money markets, which has created an opportunity for the resurgence of stable value. The top-three benefits of stable value are principal preservation, steady growth in principal and interest earned, and liquidity. In short, the returns have been similar to intermediate bond funds with the liquidity of money market funds. Also from a holistic perspective, stable value has been a core investment in DC plans, and are poised to perform well in a rising rate environment due to safety, liquidity and competitive long-term returns. Lastly, stable value provides value to 529 investors as the time to paying for college is more rigid than retirement, and especially when the beneficiary is in the late stages of high school. In closing, the ripple effect from money market reform has put money in motion and has increased the value of stable value to investors.

—Morningstar’s view on conservative options. Third, Leo Acheson, Senior Analyst within the Multi-Asset Strategies Manager Research team at Morningstar provided his commentary on the firm’s view on conservative options. First, Leo presented his analysis on how the 529 industry average glide path has become slightly more aggressive over the past six years. Second, investors favor aggressive age-based tracks even when aggressive, moderate and conservative tracks are offered. Therefore, while adjustments in conservative investment strategies does offer more value to risk adverse investors, the vast majority of the investors are trying to get the most return out of their 529 investments by allocating assets to aggressive tracks. Lastly, asset allocation of “In College” conservative portfolios varies. Therefore investors should note the wide dispersion of investment allocations among investment categories, and advisers can add value by doing the additional layers of research for their clients that they are unable or unwilling to execute on their own.

Therefore, advisors, accountants and estate planners should know the different conservative investment strategies, how stable value has increased in appeal in college financial planning and how you can add value by evaluating the investments for their clients. Have the college financial planning discussion with your clients today.