529 Savings Plans Battered in Downturn

"If your child is 4 or 5 years old, you can think about changing your investment strategy, but the markets run in cycles and you have time," said Douglas Chittenden, vice president of product management for TIAA-CREF, which runs many 529s. "But if you have an older child and you are using the money to pay a bill soon, you might consider rebalancing."

In recent months, fund managers have noticed an uptick in the number of parents shifting to safer investments. Typically, Chittenden said, 20 or 30 people rebalance their TIAA-CREF portfolios in a given week. Two weeks ago, 700 people rebalanced, he said.

But a number of parents are running into a hurdle: an Internal Revenue Service rule that limits asset re-allocations to once a year. Now many parents who have already rebalanced are stuck, and the College Savings Plan Network, which represents state 529 officials and fund managers, is thinking of asking for semi-annual or quarterly changes.

"Because the market is down, you've got a lot of parents that are nervous that their assets are in a portfolio that is not as conservative as it should be," Trader said.

In the meantime, there are ways around the rule, advisers said. For one, parents can roll the money into a new plan, which would allow for immediate asset reallocation. States offer a variety of plans with different time horizons and risk tolerances. Switching the plan to another child would also allow changes. If your child is set to start college within the next year, you could find other ways to pay for the first year or two, then tap into the fund once the market has recovered. One more option would be to keep the current allocation intact but earmark future contributions differently, advisers said.

But such need for maneuvering has raised the question of whether parents should be relying on the whims of the stock market to finance their children's education.

"This downturn is going to force people to take a step back and assess how they are saving," said Larry Glazer, founder and managing partner of Mayflower Advisors in Boston. "If you look at education funding, the problem for most people is they haven't saved enough, college is so expensive. To compound that, you have difficult investing environments."

Steven Roy Goodman, a college admissions consultant in the District, said parents should always supplement their 529 plans with other savings, in good times and bad. Think about a certificate of deposit or municipal bond, he said.

Shaun Dakin, who runs a nonprofit organization and lives in Falls Church, said he would heed that advice. His nearly 5-year-old son's 529 plan is heavily invested in stocks, so it has taken quite a hit. Thankfully, he said, college is 13 years away, enough time for him and his wife to find other ways to save money.

"We're just continuing to plug away," he said. "We'll cross our fingers that things don't go to hell in a handbasket in 10 years. Obviously there's no promise. It is what it is."