The importance of preservation in 529 accounts

Paying for college requires a comprehensive strategy that can include a mix of dedicated savings, current income, grants, loans and 529 education plan investments.  When investing in a 529 plan, it is easy to focus on maximizing returns and assume that other funding sources can provide a backstop in the event of poor market performance. However, volatility returned to markets in 2025, creating implications for 529 plan asset allocation.

Capital Group’s latest research – based on our analysis of 2.5 million CollegeAmerica beneficiaries and how they save, invest and spend for college – found that 529 investors don’t save enough, spend quickly and have low tolerance for losses.

We studied the behavior of 529 plan investors, how advisors build 529 plan portfolios and the relationships among various college funding sources. Our conclusion? A conservative asset allocation in the years approaching college enrollment may be critical to successfully funding educational goals. Market volatility can present a great opportunity for advisors to retest their clients’ approach to educational savings and investing. Here are some of the trends we discovered, along with action steps for advising 529 plan investors.

Trends among 529 plan investors

Most 529 investors begin saving early but don’t save enough, and a larger portion of contributions happen in the years approaching enrollment. Research conducted by Capital Group in 2021 and updated in 2024 found that one in four 529 investors begin saving before their child reaches the age of one, and half start by age four. However, a larger percentage of lifetime contributions typically occurs during the few years leading up to the expected college enrollment. One rule of thumb is that parents should aspire to cover at least 50% of college costs, or approximately two years of expenses. However, in reality, median beneficiaries have saved less than one year's worth of estimated expenses for private 4-year colleges by age 18.

529 savers have a short distribution horizon. What little is saved is usually spent within two years after enrollment. In fact, research conducted by Capital Group in 2025 shows that once withdrawals begin, most 529 accounts are emptied in roughly four disbursements over two academic years. Note on withdrawals: If withdrawals from 529 plans are used for purposes other than qualified education expenses, the earnings will be subject to a 10% federal tax penalty in addition to federal and, if applicable, state income tax. State tax treatment of K-12 withdrawals varies. Please consult your tax advisor for state-specific details.

Savers have a low tolerance for portfolio losses but face limited ability to reverse “panic selling” decisions because of rules limiting trading in 529 accounts. Reseach conducted by Capital Group in 2021 shows that historically, and specifically during the 2020 bear market, college savers exhibited low tolerance for losses and often moved from equities into money market options. Due to the federally mandated limit of two investment changes per year in 529 plans, investors who panic sold equities may have missed out on the subsequent equity rally in late 2020.

These documented trends suggest that advisors consider a more conservative equity allocation in the years leading up to college enrollment. However, that’s not what research shows us – instead, we see that advisor-built 529 portfolios contain large equity holdings right up until enrollment. 

Although meaningful equity allocation may make sense in the early years of saving in a 529 plan – particularly given the rising cost of higher education – we believe preservation becomes critical close to enrollment age, when college tuition is due. A correction or bear market during a student’s freshman or sophomore year, just at the time when investors tend to withdraw from their 529 accounts, affords almost no time for the account to rebound before accounts are exhausted.

Action plans for advising 529 plan investors

1. Treat volatility as an opportunity. Market volatility can be a challenge for investors pursuing any objective, but watching a semester of tuition erased in a 529 investment account a few months before your child’s enrollment date can be particularly unnerving. This presents an opportunity to connect with clients about a holistic education funding strategy and highlight your value through investment selection with 529 vehicles.

For investors furthest from enrollment, we believe total return can be a primary success metric for a 529 account. As beneficiaries near college enrollment, however, we encourage advisors to consider having conversations about positioning the portfolio more defensively, pivoting to success metrics that can include managing volatility and potential drawdown.

A key takeaway here: The closer the enrollment date, the more important it is to consider loss-avoidance rather than aggressive growth.

2. Bring scale to your practice with a college target date series. An age-based gliding solution, college target date funds automatically derisk in years approaching enrollment. Dubbed “the easy button” these funds are an efficient and relatively easy way to manage asset allocation within 529 accounts for an advisor. 

3. "Off-dating" is an option. No client is average, and target date funds may not fit every situation. Derisking in the years before enrollment does not limit investors to a single target date – those with more appetite for risk can choose to derisk more slowly.  Accordingly, if holding on to more risk suits a client’s unique financial picture, you may consider recommending they "off-date" their college target date fund selection to invest in one with a longer time horizon than what is suggested by the beneficiary’s age.

Your clients work hard to be ready to pay for their children’s college education. You can help them invest through ups and downs of the market while bringing efficiency and scale to your practice. A volatility-aware portfolio that automatically derisks in years approaching enrollment – with easy potential for personalization – can be a scalable way for advisors to manage 529 asset allocation.