529 Option: Illinois Bright Start

Update: I have selected West Virginia Smart 529 Select with DFA Funds. For the conclusion of my 529 series, go to 529 Plan Selection for My Second Daughter

In this series, I will look through 529 plans from several states that I may be interested in. The first one I will discuss is Illinois Bright Start 529 plan.

Illinois Bright Start 529 plan is considered one of the best 529 plans by several publications, including Consumer Reports. It is managed by OFI Private Investments, Inc., a subsidiary of OppenheimerFunds, Inc. The investment options include funds from Oppenheimer, Vanguard, and American Century. Illinois Bright Start offers two approaches, the Index strategy and Blended strategy. The index strategy, as the name suggests, consists mainly of Vanguard funds, except for the use of Oppenheimer Institutional Money Market Funds. The blended strategy combined index funds from Vanguard with Oppenheimer funds. As an investor that believe in index investing with low costs or expense ratios, I think the index strategy is the way to go. Thus in this review, I will focus mainly on index strategy.

Several key information:

• There is $10 annual maintenance fee for the index strategy portfolio (Vanguard portfolio options).
• The expense ratio for the Vanguard portfolio options is really low, ranging from 0.20% to 0.22%.

My main comparison in term of assets allocation will be for age 0 to 3 years. For Illinois Bright Start Age-Based Index Strategy Portfolio, the investments include:

• 63% - Vanguard Institutional Index Fund
• 9% - Vanguard Extended Market Index Fund
• 18% - Vanguard Developed Market Index Fund
• 10% - Vanguard Total Bond Market Index Fund

Personally, I would have prefer to have no bond fund at this point, but I can accept 10% bond fund. I can look at it as the buffer. In term of international fund, I would have rather have Total International Index Fund or take some % toward Emerging Market fund. Of course that would probably increase the expense ratio and make it more risky. It seems like 529 is setup to be less risk averse, which is fine and probably good for most people.

Initial look into this option, for my purpose, I would rate it 4.5/5. I really like the LOW expense ratios and the use of Vanguard. I also like the additional exposure toward mid and small cap through Vanguard Extended Market Index Fund. Note recent problems with Illinois Bright Start with Oppenheimer fund (search on Google for "Illinois Bright Start investigation"). However, since this index strategy, while managed by OFI, it invests mainly in Vanguard funds, I am not too concern about it.