There are a lot of great things to like about the MESP, but maybe the biggest benefit is the investment options. Now, the MESP has limited investment options, like most state 529 plans, but the big advantage of the MESP is the low cost of the investments. In fact, Morningstar rated the MESP as a Silver-Rated Plan, based on the simplicity to use and low cost of investments. There are only 4 state plans rated higher than the Michigan Education Savings Plan. I can’t stress enough that if you live in Michigan, you should be using the MESP and not another state’s 529 Plan. For a primer on the MESP, please read this article. For additional information regarding investing your MESP, www.misaves.com is a great resource. This post discusses the investment options in the MESP, and choosing the right investment strategy for your family.
Do it yourself or set it and forget it?
You essentially have 2 investment options in the 529 Plan; Choose individual investments (and rebalance) yourself or use an age based option which automatically adjusts as your child gets older. Those that are more comfortable with investing may prefer the control of purchasing and rebalancing individual funds. Others may prefer the set it and forget it approach of the age-based funds. One thing to remember is that the MESP only allows two rebalances per year. This means that you can’t change investments frequently in the MESP, so you will want to find and stick with an investment strategy. Now, let’s discuss the set it and forget it Age-Based Investment approach.
Most of us that have 401(k) plans are familiar with target date retirement funds. They are pretty simple. Choose one fund, which has a combination of stocks and bonds, and the investment automatically rebalances and gets more conservative as you get closer to retirement. The MESP Age-Based Investment Option works the same way. You choose if you want to be conservative, moderate, or aggressive, and as your child gets older, the portfolio gets more conservative. When your child is young you start with more equities in the portfolio, and more conservative bonds are added as he gets older. I like to call it the “set it, and forget it” strategy, because you can choose one investment and not ever make a change.
Below is a graph from Morningstar which shows the age of the child and the amount of equities in the portfolio. As you can see a child in the Moderate Age-Based Option (blue line), would have 70% equities at age 5, 60% at age 10 and 30% at age 15. The rest of the portfolio would be invested in more conservative bonds and cash.
I mentioned before that one of the best things about the MESP is the low investment costs. Many times, I will see target date accounts in 401(k) plans that cost anywhere from .5% to 1% per year. The age-based options in the MESP are just a fraction of that cost. The age-based investment options in the MESP are 0.15% to 0.20% per year. Remember, if you buy an age-based option, you only need to use one investment and you will be fully diversified. The age-based option has U.S. equities, international equities, bonds and REITs.
Now, let’s discuss choosing the individual investment option.
Choosing Individual Investments
If you want more control of your investments, the MESP has some solid choices for you too. Below are the individual investments that you can purchase in the MESP, the description of the investment, and the expense ratio.
|Investment Name||Description||Annual Expense Ratio|
|U.S. Equity Index||S&P 500 Index||0.12%|
|International Equity Index||80% International Index
20% Emerging Market Index
|Global Equity Index||70% S&P 500 Index
20% International Index
10% Emerging Market Index
|Balanced Option||54% Equities
|100% Fixed Income||70% Bond Index
10% High Yield Bonds
|Guaranteed Investment||Very conservative investment yielding 1.85% through 12/31/2018||None|
No, there are not a lot of investment choices, but there are enough to build a solid portfolio. I like the fact that the investment options are low cost index funds. It would be nice if there was a REIT or commodity fund, but overall, not too bad.
If I was building a portfolio from the individual investments I would use mainly the U.S. Equity Fund and International Equity Fund while my son is young. As he gets older, I would add more 100% Fixed Income Fund and Guaranteed Investment. Or, you could use a combination of the Global Equity Index Fund and 100% Fixed Income Fund. Either way, the goal would be to start with more equities and add the Fixed Income and Guaranteed fund to rebalance the portfolio more conservatively as your child gets closer to college.
What should I do?
You may think that as an experienced investment professional I would prefer to choose my own investments. However, I use the Aggressive Age-Based Investment Option for my young son. I like how aggressive it is, 100% equities while he is younger than 5, and how cheap it is, only 0.14% per year. I make monthly contributions, and it is easy for my contributions to go into one fund and not have to worry about it. The reason that I don’t like Target Date Retirement Funds is because they tend to be expensive, and I can choose my own investments for much cheaper. That is not the case with the Age-Based Investment Option in the MESP.
Don’t be afraid to be aggressive, especially while your children are younger. Many of us don’t fund college education with one large lump sum, rather we do it with periodic payments until our kids are in school. Therefore, be aggressive while your children are young, while the accounts are smaller. It makes sense to eventually get more conservative as your children approach college, but college is expensive, and higher investment returns can help make it a little more affordable. When I am asked from my clients my investment recommendation for the MESP, I always suggest the Aggressive Age-Based Investment Options. You may not think that aggressive and a child’s education go hand in hand, but even the Aggressive Age-Based Investment Option only has 75% in equities at age 10, and 45% in equities at age 15.
My last advice, is to not worry too much about your investments. I know this seems counter intuitive, especially in an investing article, but the only way your child will have a financially secure education, is by being dedicated to saving. Contribute as much as you can to the MESP, and don’t worry if your investments are up or down in the short-term. You can invest like Warren Buffet, but if you only contribute a small amount, it probably won’t do you much good.