Virginia Education Savings Trust (VEST) Review: Low Cost 529 Plans With Solid Investment Options
- 529 Plan:
- Virginia Education Savings Trust
Virginia Education Savings Trust (VEST) is one of the best 529 college savings plans according to Morningstar ranking. VEST is a direct-sell plan that's available nationwide. Investment choices of VEST include age-based portfolio from Vanguard and more.
When I opened the 529 college savings plan for our first daughter in 2005, the plan offered by New Jersey was never an option to me because there is not tax benefit for using NJ 529 plan even for the state residents. But that wasn’t all. What really made me stay away from NJ college savings plan, called New Jersey Best College Savings Plan that is managed by Franklin Templeton, was the poor performance of the plan and high cost of investing with plan. In fact, Morningstar has rated the plan as one of the worst 529 plans for years. Eventually, I went with two plans that also offer extra incentives: UPromise 529 Plan and Fidelity UNIQUE Plan. Both are tied to credit cards that I use often, the Bank of America UPromise Card (1% cash back) and Fidelity 529 College Rewards Card (2% cash back), so I can turn cash back earned from using the cards into savings for college. While it’s nice to have that extra money invested without much effort since I use the credit card for almost every purchase anyway, I have to admit now that the choice wasn’t the best that I could have made back then. Therefore, when it was time to get another 529 account for the younger one, I did my research more thoroughly and settled with Ohio CollegeAdvantage 529 Plan. So far, I am very happy with the Ohio plan, not only because the plan’s low cost and wide selection of funds, but also the periodic referral bonus offers, which has provided a huge boost to the account’s growth last year.
All the above investment decisions were made when we were living in New Jersey.
Now that we have settled in Virginia, it’s time to make some adjustments to our 529 plans. Unlike the state of New Jersey, Virginia offers a better option for saving for college and tax incentive for using the state sponsored program. Currently, Virginia has four college savings plans: Virginia Prepaid Education Program (VPEP), Virginia Education Savings Trust (VEST), CollegeAmerica and CollegeWealth. The plan I chose is the Virginia Education Savings Trust (VEST) because
- It’s a direct-sold college savings plan that is open for enrollment all year long;
- It offers a wide selection of low-cost investments, including stocks (domestic and international), bonds, TIPS, and REIT;
- It was selected as one of the best 529 plans by Morningstar;
- We can deduct up to $4,000 per year per account in Virginia income tax.
VEST Investment Portfolios
The tax benefit alone isn’t enough for me to make the switch. Fortunately, that’s not only benefit the VEST plan offers. The main advantage of the plan, in my opinion, is its investment choices. VEST plan has two types of porfolios: Age-based evolving portfolios and non-evolving portfolios.
The age-based evolving portfolios consist a total of nine portfolios: Eastern Shore, Alleghany, Chesapeake, Potomac, Southside, Blue Ridge, and Piedmont. With the age-based portfolios, as we know, the asset allocations, mainly between stock and fixed income, of each portfolio evolves as the beneficiary’s age approaches the age for college. It works a lot similar to the way that life-cycle funds work. For age-based evolving portfolios, the underlying investments include large-cap, small-cap/mid-cap domestic equity funds, foreign equity funds and fixed income funds, managed by Vanguard, Templeton, Capital Research and Management, INVESCO, etc.
On the other hand, non-evolving portfolios include ten portfolios: Aggressive Portfolio, Moderate Portfolio, Conservative Portfolio, Money Market Portfolio, Total Stock Market Index Portfolio, Total Bond Market Index Portfolio, Total International Stock Index Portfolio, Inflation-Protected Securities Portfolio, REIT Index Portfolio, and Socially Targeted Investment Portfolio, all but the last one are made of Vanguard index funds.
After examining both types of portfolios, I decided to use funds in the non-evolving portfolios category to build my own portfolio in order to, I hope, boost the growth of the portfolio when our kids are both more than 10 years away from college. The four funds I chose are: Vanguard Total Stock Market Index Fund (50%), Vanguard Total International Stock Index Fund (33%), Vanguard REIT Index Fund (8%) and Vanguard Total Bond Market Index Fund (9%). Right now, the portfolio invests heavily in stocks as you can see from the above asset allocations. Going forward, I will have to the adjust the allocation of the portfolio myself as the portfolio is not evolving “automatically”. It’s an additional job that I will need to do myself, but it gives me the flexibility I want in building the portfolio. Will this be a good strategy or a bad one? Only time will tell
When selecting an investment, whether it’s a regular investment such as a mutual fund, or an investment for college like the 529 plan, cost is always a top concern to me. Since most of VEST’s underlying funds are low-cost Vanguard index funds, the overall cost of investing in VEST plan is rather low. For example, the total annual fees for age-based portfolio range from 0.35% (Piedmont Portfolio) to 0.53% (Eastern Shore Portfolio). For non-evolving portfolios, the Socially Targeted Portfolio has the highest cost at 1.0%%. All other Vanguard funds are quite cheap, with costs from 0.30% (Total Stock Market Index Fund) to 0.52% (Total International Stock Index Fund).
In addition, VEST plan also charges an one-time application fee of $25 for each new account. Other fees include
- Account cancellation: $25
- Change of beneficiary: $10
- Rollover to another QTP: $25
- Change of account owner: $10
- Non-sufficient funds: $25
- Expedited distribution: $50
Overall, it seems that investing with VEST plan costs a little bit more than doing so with the Ohio CollegeAdvantage plan, especially for age-based portfolio, and Ohio plan doesn’t charge account setup as the VA plan does. However, both plans are rather cheap to own and both offer great investment choices. What makes the VA plan even sweeter is the $4,000 per account annual Virginia tax deduction. It will make that little additional cost worth it.
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