Staying Invested in 529 Plans During Market Volatility

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Stay Enrolled: Why 529s Pass the Test of Time

As a financial advisor, you know staying invested through volatility is one of the hardest disciplines for clients to maintain, especially when it comes to goal-based savings like education. During volatile markets like the ones we are facing today, clients may question whether to pause 529 contributions or reallocate the account to cash or cash equivalents such as high yield savings or money market accounts. But time-tested strategies and data reaffirm that staying the course can significantly enhance long-term outcomes.

“529 Day” on May 29 offers an opportunity to review current educational savings strategies, focused on the importance of staying the course.

Behavioral Biases and Reframing the Narrative

Investor behavior is often driven by emotion — fear during downturns, exuberance during rallies, and loss aversion which shows that clients tend to feel the pain of losing something more strongly than the pleasure of gaining the same amount. During periods of volatility, it is incredibly important to demonstrate empathy and create space for your clients to process these tumultuous emotions.

It’s important to remind them that their 529 plans were intentionally designed to be long-term saving vehicles focused on their child’s future education needs. Recentering their focus on those needs rather than short-term market fluctuations may reduce their anxiety and help them stick with the investment strategy. By shifting the reference point from the market dip to where they started saving, you can help your clients see the longer-term steady growth rather than the short-term setback. Plus, it is worth reminding them that college costs don’t pause during corrections or recessions. If anything, the cost of education has historically outpaced inflation¹, meaning the need for long-term planning remains constant regardless of market conditions.

Why the Long View Pays Off

Staying invested in 529s during downturns positions investors to benefit from the recovery - highlighting the value of time in the market over timing the market. They avoid locking in losses and also have an opportunity to buy shares at potentially lower prices. By staying invested and continuing their 529 contributions in spite of market volatility, your clients benefit from the power of long-term compound growth.

Data indicates that missing top performing days in the market can significantly negatively impact returns over time. For example, an individual who remained invested for the entire time period between January 1, 2005 to December 31, 2024 would have accumulated $717,046, while an investor who missed just five of the top-performing days during that period would have accumulated only $452,884.²

In addition, remind your clients that their asset allocation, including within the 529 plan, is aligned with their risk tolerance and time horizon. For example, target enrollment portfolios adjust automatically as the child approaches college, helping manage risk. If college expenses are approaching, reassure them the portfolio is likely exposed to less volatility. And for those clients proactively rebalancing and adopting a more conservative fixed income strategy due to a shorter time horizon, demonstrate how the tax-exempt yield on those investments in a 529 account remains attractive compared to the taxable equivalent yield in a taxable brokerage account. While the risk profile may be getting more conservative than when invested in equities, a fixed income investment yielding 4% in a 529 account, equates to a near 6% yield!³

This is also a great moment to revisit 529 investment options and renew your clients’ confidence in the plan you built together.

Use Volatility as an Opportunity to Teach Dollar Cost Averaging

There are also other strategies you can review with clients to bolster their confidence and give them a sense of agency during more volatile market conditions. One is to demonstrate the power of dollar cost averaging and investing consistently, even in smaller amounts, to average out investment costs over time. When the market declines, have your clients buy more shares, and when it rises, buy fewer, which effectively smooths out the average cost per share and bypasses the emotional investing roller coaster all together.

Also, reiterate with clients the benefits they receive from a 529 plan relative to other tax-exempt investments, including municipal bonds. The funds from 529 plans can be used for a variety of educational expenses. From trade schools to traditional colleges and universities and even graduate school, 529s are flexible enough to accommodate a variety of educational paths. So your clients can be rest assured that, when they're ready, their future student will have options. Your clients can even choose to have friends and family give meaningful gifts, like 529 contributions, during uncertain markets. It's a gift with a lasting impact that the recipient won't outgrow.

Tax Advantages Make 529s a Smart Investment in Any Market

Lastly, you can highlight to your clients how the tax-deferred growth of 529 plans can outperform taxable brokerage accounts over time. For example, assume the 529 account was funded with $10,000 to start and $10,000 was contributed annually with a 6% rate of return and 24% tax bracket over 18 years. Year over year the 529 account has a larger balance than the taxable brokerage account because of its tax deferred benefit. Even if the account owner only uses 25% of the funds for qualified education expenses, they still come out ahead with the 529 account compared to the taxable brokerage account despite the additional 24% income tax and 10% penalty.⁴

While market volatility is incredibly difficult to stomach, educating your clients on how 529 plans offer these several tax advantages can help cushion the emotional and financial impact. With 529 plans, clients can rebalance or ride out market dips, like we saw during the recent April slide, without triggering capital gains taxes. The tax-free growth and withdrawals for qualified education expenses help keep their college savings on track, even when markets get choppy.

Conclusion: Keep Clients Calm, Committed, and Confident

Volatility is emotional. But as their financial advisor, you can help clients zoom out, refocus on what really matters, and stay committed to their child’s future. Take advantage of 529 Day this May to proactively revisit their strategy, reframe any fear-driven thinking, and reinforce the discipline of staying the course. When clients stay invested, they don’t just weather the storm - they harness the power of time and compounding to come out stronger on the other side. The best plan for education? Staying in the plan.

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