BOSTON (AP) —
Fidelity Investments is opening up some of its college savings plans by including other companies’ mutual funds on its menu of investment options, rather than restricting investors to Fidelity’s own funds.
Fidelity, the third-largest manager of 529 college savings plans, announced the change on Tuesday.
Here are the basics:
— Background: Section 529 college savings plans are named after the federal tax code that created them in 1997. These accounts enable parents to withdraw money for college expenses free of federal taxes. They’re popular because there are notable tax benefits for those going this route, compared with stashing the savings in bank accounts or certificates of deposit. Each plan is sponsored by a state that can set its own guidelines, including offering a tax deductions or credit to its residents. Investors aren’t limited to investing in their own state’s plan.
— Open or closed?: Traditionally, 529 plans have restricted investment options to mutual funds from the company managing the plan. However, some 529s have adopted “open-architecture” approaches, where the investment menu includes funds offered by other companies. Investors get access to funds that might have better managers than the company operating the plan, and might deliver superior investment performance. However, there’s no guarantee that will be the case. And open-architecture plans typically charge higher fees, which could offset any performance edge.
— Who can participate: Fidelity’s expanded investment menu is available to investors nationwide in four 529 plans that the Boston-based company manages. Those are the Arizona-sponsored Fidelity Arizona College Savings Plan; the Delaware College Investment Plan; the Massachusetts U. Fund College Investing Plan; and the New Hampshire UNIQUE College Investing Plan. Collectively, those plans manage about $9.3 billion, or nearly 8 percent of all assets in 529 plans, according to fund tracker Morningstar.
— The new options: The outside funds that investors in the Fidelity 529 plans can now choose from are selected by Fidelity. Examples of funds with strong performance records include JPMorgan U.S. Equity, MFS International Value, and Pimco Total Return. Plan portfolios typically hold a mix of funds investing in stocks, bonds and money-market investments. As a child gets closer to college age, the investment mix becomes more conservative. That shift reduces the potential for a big loss just as a student needs to draw from savings to help cover tuition, books and room and board.
— Fees: Program fees and expenses for funds in Fidelity’s new multi-company 529 plan options run from 0.93 percent to 1.42 percent of plan assets. That’s more costly than the 529 options that Fidelity continues to offer using only in-house funds. Fees and expenses range from 0.57 percent to 1.06 percent for a 529 plan option in which assets are invested in funds that rely on professional managers to pick investments. The range is 0.25 percent to 0.35 percent for 529s that invest in index funds which passively track market indexes.