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Personal finance

Kicking the tires of a 529 glide path

We test our framework for where to invest assets intended for a child's future college education.
5 minute read
September 01, 2023
Personal finance
Education savings
529 education plans

Saving for college is daunting already but choosing a 529 investing option can be just as fraught. Vanguard's approach to 529 plans includes an option to employ a glide path, or a series of asset allocations over time, that's designed to help investors maximize the risk-adjusted value of their college savings. Recent Vanguard research pressure-tested the glide path to determine whether it's built to last.

Defining a college savings goal

As parents think about a young child's future, saving for college is replete with questions like where the child will go to school, how much it'll cost, how much financial aid they can expect, and more. By wrestling with such questions, parents can estimate how much to save before the tuition bills are due.

At the same time, an important consideration is where they should invest those assets before the child heads to college. 

Parents who are saving for their kids' education in a 529 plan can have very different circumstances from each other. We don't want it to just work for one parent, we want it to work for a whole range of parents who are saving in different ways, spending in different ways, and sometimes starting a little later than is ideal.

—Ankul Daga, CFA, head of goals-based investing research at Vanguard

You can get there from here

That's where the Vanguard Target Enrollment Portfolios glide path comes in.

Vanguard Target Enrollment Portfolios glide path

Source: Vanguard

The glide path, introduced in 2020, begins with a weighting of 95% stocks and 5% bonds when college is still around 15 to 18 years in the future. As college enrollment draws closer, the stock allocation decreases and the bond allocation increases. In the final few years, cash is added incrementally; eventually, it has a larger weighting than stocks and bonds combined.

Projected investment returns and other information generated by Vanguard's proprietary models, including the Vanguard Capital Markets Model® and the Vanguard Life-Cycle Investing Model, were used to establish the optimal asset allocations for the glide path. The primary considerations included financial utility analysis of the trade-offs among returns, spending, and portfolio stability.

Using the glide path, 529 plan investors can select a Target Enrollment Portfolio based on their risk tolerance and the child's anticipated year of enrollment in a school. The allocations are automatically adjusted on a quarterly basis to become more conservative as enrollment draws nearer.

Exam time

Daga and Bryan Hassett, CFA, an investment strategy analyst, recently conducted a validation review of the glide path. Such reviews are performed regularly by Vanguard's goals-based investing research team to determine whether the plan is structured appropriately to help investors attain their end goals.

The researchers updated the glide-path inputs with recent Vanguard college-cost research and tested variables that could affect investor outcomes: savings pattern (below average or above average), spending target (higher or lower), college inflation (greater than expected), household assets (higher or lower), age of child when saving starts (ages 5 or 10), and risk aversion (higher or lower).

The analysis determined that a limited number of investors can gain value by customizing the glide path. For example, investors more comfortable with risk can select a more distant target enrollment date, thereby taking on additional equity risk, and risk-averse investors can shift to an earlier date, moving more quickly to a higher fixed income and cash allocation. Parents who start saving when a child is 5 or 10 can receive a small benefit by choosing a glide path with higher equity exposure—which also comes with more risk.

Other variations, including college-cost differences and savings behavior changes, didn't indicate any need for adjustment to the glide path for Vanguard Target Enrollment Portfolios, the authors write.

"We found that our 529 glide path is suitable for the purpose, so we did not recommend any changes," Daga said.

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For more information about any 529 savings plan, contact the plan provider to obtain a Program Description, which includes investment objectives, risks, charges, expenses, and other information; read and consider it carefully before investing. If you are not a taxpayer of the state offering the plan, consider before investing whether your or the designated beneficiary's home state offers any state tax or other benefits that are only available for investments in such state's qualified tuition program. Vanguard Marketing Corporation serves as distributor for some 529 plans.

IMPORTANT: The projections and other information generated by the Vanguard Capital Markets Model regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. VCMM results will vary with each use and over time.

The VCMM projections are based on a statistical analysis of historical data. Future returns may behave differently from the historical patterns captured in the VCMM. More important, the VCMM may be underestimating extreme negative scenarios unobserved in the historical period on which the model estimation is based.

The Vanguard Capital Markets Model® is a proprietary financial simulation tool developed and maintained by Vanguard's primary investment research and advice teams. The model forecasts distributions of future returns for a wide array of broad asset classes. Those asset classes include U.S. and international equity markets, several maturities of the U.S. Treasury and corporate fixed income markets, international fixed income markets, U.S. money markets, commodities, and certain alternative investment strategies. The theoretical and empirical foundation for the Vanguard Capital Markets Model is that the returns of various asset classes reflect the compensation investors require for bearing different types of systematic risk (beta). At the core of the model are estimates of the dynamic statistical relationship between risk factors and asset returns, obtained from statistical analysis based on available monthly financial and economic data from as early as 1960. Using a system of estimated equations, the model then applies a Monte Carlo simulation method to project the estimated interrelationships among risk factors and asset classes as well as uncertainty and randomness over time. The model generates a large set of simulated outcomes for each asset class over several time horizons. Forecasts are obtained by computing measures of central tendency in these simulations. Results produced by the tool will vary with each use and over time.

The Vanguard Life-Cycle Investing Model (VLCM) is designed to identify the product design that represents the best investment solution for a theoretical, representative investor who uses the target-date funds to accumulate wealth for retirement. The VLCM generates an optimal custom glide path for a participant population by assessing the trade-offs between the expected (median) wealth accumulation and the uncertainty about that wealth outcome, for thousands of potential glide paths. The VLCM does this by combining two set of inputs: the asset class return projections from the VCMM and the average characteristics of the participant population. Along with the optimal custom glide path, the VLCM generates a wide range of portfolio metrics such as a distribution of potential wealth accumulation outcomes, risk and return distributions for the asset allocation, and probability of ruin, such as the odds of participants depleting their wealth by age 95.

The VLCM inherits the distributional forecasting framework of the VCMM and applies to it the calculation of wealth outcomes from any given portfolio.

The most impactful drivers of glide path changes within the VLCM tend to be risk aversion, the presence of a defined benefit plan, retirement age, savings rate, and starting compensation. The VLCM chooses among glide paths by scoring them according to the utility function described and choosing the one with the highest score. The VLCM does not optimize the levels of spending and contribution rates. Rather, the VLCM optimizes the glide path for a given customizable level of spending, growth rate of contributions, and other plan sponsor characteristics.

A full dynamic stochastic life-cycle model, including optimization of a savings strategy and dynamic spending in retirement, is beyond the scope of this framework.

All investing is subject to risk, including the possible loss of the money you invest.

Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objective or provide you with a given level of income.

Investments in bonds are subject to interest rate, credit, and inflation risk.

CFA® is a registered trademark owned by CFA Institute.