In my previous post, I wrote about why I opened a 529 plan in anticipation of the SECURE Act allowing tax free 529 withdrawals for student loan repayments. Due to laziness, I simply opened an new account with Merrill because I am already a customer and their plan seemed reasonable, charging only 0.18% expense ratio for an S&P 500 index fund.
After doing more research on 529 plans by different states, however, I came to the conclusion that a better plan is available than the Maine 529 plan offered by Merrill. I eventually narrowed down to two options: Fidelity's NH plan and Vanguard's NY plan. Both are a vast improvement over Merrill's ME plan with much lower costs.
Fidelity's NH plan is the lowest cost 529 plan currently available. It charges only 0.11% expense ratio on index fund options. It offers three low cost stock investment options: Fidelity 500 Index, Total Market Index, and International Index. I would only consider stock investments because bonds and cash have extremely low expected returns and will lose real value over time.
Vanguard's NY plan, on the other hand, charges a slightly higher expense ratio of 0.13%, which is a flat rate on all investment choices. The difference in fees compared to Fidelity's plan is negligible: just $0.20 per year per $1,000 account value. I expect the fee difference is only a little more than a dollar over my investment time frame, as I plan to contribute $40 per month over 5 years, assuming 10% annualized return. See table below:
Under these assumptions, I will stop contributing after five years when my account balance reaches the remaining student loan balance. I will have paid $3.86 in fees under the NY plan versus $3.26 under the NH plan, a difference of only $0.59 (not $0.60 due to rounding). This also assumes no withdrawal during the roughly 5 years of investment, which is probably not realistic as I will likely withdraw if I have gains once the SECURE Act becomes law. Any withdrawal will reduce fees paid.
So, fees are similar between the NY and NH plans. If there are no other differences, I would pick the lowest cost option.
There is a much bigger difference at play here though: the NY plan offers a lot of investment options. There are six stock investment options instead of just three in the NH plan (realistically only two because 500 Index and Total Market Index are close enough they are basically the same).
The stock portfolio options are:
Aggressive Growth: Vanguard ® Total Stock Market Index Fund (70%)
Vanguard Total International Stock Index Fund (30%)
Developed Markets: Vanguard Developed Markets Index Fund (100%)
Growth Stock: Vanguard Growth Index Fund (100%)
Mid-Cap Stock: Vanguard Mid-Cap Index Fund (100%)
Small-Cap Stock: Vanguard Small-Cap Index Fund (100%)
Value Stock: Vanguard Value Index Fund (100%)
These choices offer emerging market exposure in the aggressive growth portfolio, as well as mid-cap and small-cap exposures not available through Fidelity's NH plan.
The benefit of allocating to different funds in a portfolio is to increase diversification and use dollar-cost averaging (DCA) to rebalance portfolio each month, buying more of cheaper assets and less of pricier assets, which helps to lower cost basis and increase overall return, assuming the different types of assets have similar expected returns.
Given that the fee difference is negligible, Vanguard's NY plan is clearly the superior 529 plan with its far greater investment offering.
Once that decision has been made, the only other decision is how to customize my portfolio using these six fund options. I decided to avoid the developed markets, because they are in a secular bearish trend weighed down by their unfavorable aging demographics. I want to have at least 10% in each fund to take advantage of DCA and at least 20% allocation to small cap stock, which offers greater expected returns than large cap stock. In the end, I decided on this allocation:
That gives me 85% US versus 15% international. The Vanguard Total International Stock Index Fund invests roughly 20% in emerging markets, so my breakdown is 85% US, 12% Developed, 3% EM. If it were up to me, I would prefer much more EM compared to developed, but that is not an option here.
By market cap, I have 70% large, 10% mid, and 20% small. That should be enough to capture the excess small cap return.
By style, it leans toward growth, since the total stock market index leans toward growth. I allocate 10% each to the growth and value stock funds for DCA.
Overall, I am very satisfied with my change from Merrill's ME plan to Vanguard's NY plan. I get much lower expenses (0.13% vs. 0.18%), and far more diversification to guard against the risk of losing value over my 5-year investment time frame.
After doing more research on 529 plans by different states, however, I came to the conclusion that a better plan is available than the Maine 529 plan offered by Merrill. I eventually narrowed down to two options: Fidelity's NH plan and Vanguard's NY plan. Both are a vast improvement over Merrill's ME plan with much lower costs.
Fidelity's NH plan is the lowest cost 529 plan currently available. It charges only 0.11% expense ratio on index fund options. It offers three low cost stock investment options: Fidelity 500 Index, Total Market Index, and International Index. I would only consider stock investments because bonds and cash have extremely low expected returns and will lose real value over time.
Vanguard's NY plan, on the other hand, charges a slightly higher expense ratio of 0.13%, which is a flat rate on all investment choices. The difference in fees compared to Fidelity's plan is negligible: just $0.20 per year per $1,000 account value. I expect the fee difference is only a little more than a dollar over my investment time frame, as I plan to contribute $40 per month over 5 years, assuming 10% annualized return. See table below:Under these assumptions, I will stop contributing after five years when my account balance reaches the remaining student loan balance. I will have paid $3.86 in fees under the NY plan versus $3.26 under the NH plan, a difference of only $0.59 (not $0.60 due to rounding). This also assumes no withdrawal during the roughly 5 years of investment, which is probably not realistic as I will likely withdraw if I have gains once the SECURE Act becomes law. Any withdrawal will reduce fees paid.
So, fees are similar between the NY and NH plans. If there are no other differences, I would pick the lowest cost option.
There is a much bigger difference at play here though: the NY plan offers a lot of investment options. There are six stock investment options instead of just three in the NH plan (realistically only two because 500 Index and Total Market Index are close enough they are basically the same).
The stock portfolio options are:
Aggressive Growth: Vanguard ® Total Stock Market Index Fund (70%)
Vanguard Total International Stock Index Fund (30%)
Developed Markets: Vanguard Developed Markets Index Fund (100%)
Growth Stock: Vanguard Growth Index Fund (100%)
Mid-Cap Stock: Vanguard Mid-Cap Index Fund (100%)
Small-Cap Stock: Vanguard Small-Cap Index Fund (100%)
Value Stock: Vanguard Value Index Fund (100%)
These choices offer emerging market exposure in the aggressive growth portfolio, as well as mid-cap and small-cap exposures not available through Fidelity's NH plan.
The benefit of allocating to different funds in a portfolio is to increase diversification and use dollar-cost averaging (DCA) to rebalance portfolio each month, buying more of cheaper assets and less of pricier assets, which helps to lower cost basis and increase overall return, assuming the different types of assets have similar expected returns.
Given that the fee difference is negligible, Vanguard's NY plan is clearly the superior 529 plan with its far greater investment offering.
Once that decision has been made, the only other decision is how to customize my portfolio using these six fund options. I decided to avoid the developed markets, because they are in a secular bearish trend weighed down by their unfavorable aging demographics. I want to have at least 10% in each fund to take advantage of DCA and at least 20% allocation to small cap stock, which offers greater expected returns than large cap stock. In the end, I decided on this allocation:
Your Current Investment Options
Any future contributions to this account will be invested as follows:
| Portfolio Name | Percent |
| Aggressive Growth Portfolio | 50% |
| Mid-Cap Stock Index Portfolio | 10% |
| Growth Stock Index Portfolio | 10% |
| Value Stock Index Portfolio | 10% |
| Small-Cap Stock Index Portfolio | 20% |
| Total | 100% |
That gives me 85% US versus 15% international. The Vanguard Total International Stock Index Fund invests roughly 20% in emerging markets, so my breakdown is 85% US, 12% Developed, 3% EM. If it were up to me, I would prefer much more EM compared to developed, but that is not an option here.
By market cap, I have 70% large, 10% mid, and 20% small. That should be enough to capture the excess small cap return.
By style, it leans toward growth, since the total stock market index leans toward growth. I allocate 10% each to the growth and value stock funds for DCA.
Overall, I am very satisfied with my change from Merrill's ME plan to Vanguard's NY plan. I get much lower expenses (0.13% vs. 0.18%), and far more diversification to guard against the risk of losing value over my 5-year investment time frame.
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