State education savings plans mostly miss targeted returns, JLARC report finds

Virginia’s state-run educational savings programs have not met the majority of their investment-return benchmarks, according to a legislative audit released Monday. 

The report by the Joint Legislative Audit and Review Commission assessed valuations and returns until the end of the first quarter, March 31. 

The programs are used by families to save tax-advantaged money for the purpose of paying for elementary, secondary and higher education costs. In a JLARC meeting Tuesday officials acknowledged that underperformance results in less savings for these families. The overarching program, Virginia529, is the largest of its kind in the country, “with $97.2 billion in assets and a 21
percent share of the national market as of March 31, 2022,” JLARC reported.

In the case of the Defined-Benefit 529 fund —worth $3.1 billion— JLARC cites the investment fund managers’ “defensive posture” to mitigate against elevated inflation and interest rates, as well as volatility and market downturns, to explain the less-than-expected growth which was concentrated in public equity and fixed income assets. However, the Defined-Benefit 529 fund still has enough assets to continue meeting its payout obligations. 

As of Mar. 31, the fund failed to reach its return benchmark at the 3-year, 5-year, and 10-year horizon and recorded a -3.4 percent return since the start of the calendar year, surpassing the -1.9 percent goal. The fund has underperformed for a few years under “both strong market conditions and down markets,” which the report called concerning.

In a defined-benefit savings plan, participants buy contracts that will cover the anticipated cost of college tuition and fees based on a weighted average tuition.

Defined contribution plans, in which individuals pay into the plan and exercise discretion over their asset allocation similar to a 401(k), such as the state-run Invest529 and the advisor-run CollegeAmerica, also mostly fell short of their targeted rates of return. The Invest529 fund, totaled at $7.6 billion, “generally underperformed both long-term and near-term benchmarks” because individual managers fell short of their benchmarks, per JLARC. 

Virginia529 staff has made changes to Defined-Benefit 529 fund that it believes will increase the fund’s performance, including transitioning from an active to a passive management strategy for public equity and reallocating investments in certain types of bonds. A new investment director was hired last month as well, JLARC notes.