529 Option: PA 529 Plans

Thursday, August 20, 2009 |

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

I am continuing on my look at 529 options for my second daughter. For the other 529 plans that I am considering or at least looked at, click here.

As a resident of Pennsylvania, I don't necessary have to stick with PA 529 plans to get state tax deduction. PA is one of the few states that give tax deduction regardless of which 529 plans I choose. However, there are several advantages of investing in PA 529 plans, and one of those is the investments I have in PA 529 plans are excluded for state financial aid purposes.

PA 529 plans have been re-branded several times in the last two years. Prior to September 2007, the plan was known as TAP 529. In Sept 2007, the plans were rebranded as nowU. However, when I log on to the site a week ago to check for my first daughter investments, I noticed that they no longer call it nowU. It is simply call Pennsylvania Treasury 529 College Savings Program. The new website is now www.makecollegepossible.com.

PA 529 plans offer two different options:

Guaranteed Savings Plan (GSP).
In this plan, the investor will be buying tuition credit based on current price. Below is what is written on the website for PA GSP.

The GSP provides the advantages of 529 plans and guarantees that your savings will keep up with the rising cost of college tuition. The GSP is unique because you save for tomorrow's college expenses at today's lower rates

This is relatively good option and I was very tempted on this option. However, there is one thing that bother me. Who guaranteed the performance? I think the plan actually take the money and invest it and hoping that the investment will be able to beat tuition rate increases. And this is what you can find on the footnote:

The guarantee is that, when used for qualified higher education expenses, your contributions will grow at the rate of tuition inflation at a Tuition Level that you choose. If the applicable GSP Credit Rate at the time a contribution is made has a premium, however, your rate of growth will be lower than the actual rate of tuition inflation at your Tuition Level by approximately the rate of the premium. Premiums do not, however, alter the way in which the dollar value of your account is determined. When used for qualified higher education expenses, each GSP Credit will still have the full value of the actual per credit tuition cost. The guarantee is an obligation of the Pennsylvania GSP Fund only. The guarantee is not backed by the full faith and credit of the Commonwealth of Pennsylvania, and is not an obligation of the Commonwealth of Pennsylvania, the Pennsylvania Treasury Department, Upromise Investments, Inc., Upromise Investment Advisors, LLC, or any other party. The GSP is not insured by the Federal Deposit Insurance Corporation or any other government agency.

Now, as you can see, this is not federally insured by FDIC or any other government agency, including the Commonwealth of Pennsylvania. What happen if they can't cover the redemption request? I remembered reading awhile back that they were not fully funded. I tried to find more info on this but I have not found reliable new information yet. If I find it, I will add it to this post later. (see update)

I personally prefer to know for sure where my money is invested, even if I may not be able to beat the increase in tuition rates. Thus the reason I prefer PA 529 Investment plan, where I have my first daughter 529 plan.

Update: I should have done my research. But as I have guessed, as of June 30, 2009, the present value of liabilities is $1,317,919,467 and the present value of assets is $1,095,022,856. That is a whopping $222,896,612 short. And I have read that PA GSP will be charging premiums for many college tuition levels. There ain't no such thing as a free lunch folks. PA GSP sounds great, until you actually dig deeper and found out it is not really "guaranteed" by the Commonwealth of PA or Fed.

Investment Plan
This plan offers Vanguard funds and managed by uPromise. You can invest in three age-based options (Aggressive, Moderate or Conservative) or 10 different individual options. The age-based options itself is actually investing in the 10 different individual options, except the fact that it will move you from one option to another option once your child get to certain age group. For my first daughter, we invest in aggressive age-based options.

Here are several observations I have with this plan:
  • The expense ratios and fees for each funds offered by PA 529 Investment Plan are surely not the cheapest available. The fees range from 0.70% to 0.75%. From all 529 plans that I have reviewed so far, in term of 529 plans that offer Vanguard funds, I think Illinois Bright Start offers the combination of fees and options. I should have done more research for my first daughter 529 plan last time. I think last time I was swayed by the fact that by choosing PA 529 plan, the assets in the plan are excluded for state financial aid purposes. But since my first daughter 529 plan is already in PA plan, I don't want the hassle of migrating to a different plan.
  • In most cases, the equity part of investments are invested in Total Stock Market. Example, for Aggressive Growth Portfolio, the allocation is 85% Total Stock Market Index Fund and 15% Total International Stock Index Fund. I have mentioned previously, such as in my review of West Virginia Smart529Select plan, I would prefer more international allocations and higher weight toward small cap and value funds.
  • One thing that I like is that it is easy to start with PA 529 Investment Plan since there is no fees except asset based management fees and you can start as little as $25, so there is no reason why you could not start investment in your child's college funds. In comparison, Illinois Bright Start, which I really like, charge $10 annual maintenance fees for index strategy portfolio.

I think I will stop looking at other 529 plans after this one. I want to make selection fast. The option that I have looked into so far has been all offering Vanguard funds with the exception of West Virginia 529 plan. Right now, my top three in no particular order are:
  • Illinois Bright Start - low expense ratios
  • PA 529 Investment Plan
  • West Virginia Smart529Select - DFA Funds


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