Any good finance researcher will tell you that roughly two-thirds of the time, low-cost index funds churn out better returns for investors than actively managed mutual funds.
, it turns out, is providing us with an educational case on that point.
Last week, I looked at the plan's performance over the three years that
. In two of three instances, its passively managed index portfolios have generated slightly higher returns than their actively managed counterparts.
I also found that investing in an appropriate mix of the plan's three index funds beat all but one
in the plan, with only one exception.
"It doesn't surprise me at all," John Settle, just-retired associate finance professor at Portland State University, said of my results. He served on a committee that recommended a replacement for TIAA-CREF's
. "Most of the studies show active management, at best, pays for its fees."
Investors seem content with the plan. They generally should be. Since TIAA-CREF took over in 2010, assets have grown by about 80 percent to nearly $900 million. Total accounts have grown by more than 50 percent to 69,000.
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The state and its manager have
, added investment options and offered a handy
.
There've been disappointments. Because of near-zero interest rates, the fund's ultra-conservative Money Market portfolio
for more than a year, until TIAA-CREF suspended its fees after The Oregonian disclosed the problem.
While investor expenses are reasonable, they're still too high. Fees are the main reason all but one fund portfolio lags their published benchmark.
Fortunately, Oregon's tax deduction makes up for those fees, and then some. I'll get to that point later.
Oregonians have another tax-deductible college savings option: the broker-sold
. But this column focuses on the direct-sold
, which investors can tap on their own. It's less expensive and easier for investors to manage.
Stock indexes win:
Index funds, you'll recall, aim to track a broad market index. Actively managed funds try to beat those indexes.
Over the past three years, both TIAA-CREF's
and the
generated slightly higher annualized returns than the actively managed
and the
. The differences amount to less than half-a-percentage point each year. But over 18 years, that can add up to an extra year or two of textbooks.
The exception came in the bond space. The actively managed
returned 5.4 percent a year over three years, clearly beating the
's 4.2 percent annualized return. It's the lone portfolio in the plan to beat its benchmark.
Do-it-yourself trumps hands-off:
The plan's
, which make up one-third of all accounts, are billed as a set-it-and-forget-it option for hands-off investors. TIAA-CREF automatically invests the money in up to six stock- and bond-index funds, spread in a way that fund managers believe reflects risks appropriate for the child's time to graduation.
It also automatically moves the money to the next age-based fund as the child grows older, ensuring a more conservative investment as college nears.
Hands-off investors also can use one of three
: Aggressive, Moderate or Conservative. Each also invests in up to six index funds.
While convenient, they might not provide the best returns. I compared the multifund portfolio returns through May 31 with the returns of my own hypothetical mix of three index funds in the plan.
Look at the results in the accompanying chart. You'll find that an appropriately diversified, three-index fund mix outperformed nearly all the other portfolios.
The one exception: The plan's
It invests in only two index funds: 60 percent in the Equity Index fund and 40 percent in the Bond Index fund. That mix has outperformed similar moderate mixes in the plan, including the one I proposed. It's evidence again that sometimes, simple investing is the best investing.
One warning about this do-it-yourself approach: You'll have to rebalance the investments over time on your own. The age-based portfolios do that for you. And the plan allows rebalancing only once a year.
So if you pick this simpler, self-diversifying route, do it only if you know that you'll carefully monitor it over time. If you know you won't do that, best stick with the age-based funds.
Not-so conservative options:
The plan offers other conservative options for college-age students, but two of them should be avoided like I-5 near Eugene and Corvallis on a college-football Saturday.
For now, steer clear of the plan's
. If interest rates increase any more, then this portfolio's value will decline again. It already was down more than 4 percent year-to-date through May 31.
And as I explained earlier, the
has not served investors.
A better choice is the
. It has returned just more than 2 percent a year since inception. This is where you want to put your money as your teen nears graduation and enters college. It's the safest conservative investment option in the plan.
On fees:
TIAA-CREF also manages California's
, and the expense ratios of its index and bond index portfolios cost one-third to one-half as much as Oregon's. Not surprisingly,
are slightly better.
because it's a larger plan, with $4.7 billion in assets and 242,000 accounts. TIAA-CREF passes the benefits of that economy of scale to investors in the form of lower expenses.
Before you cry foul, remember if you're an Oregonian and you invest in California's plan, you forgo a tax deduction.
effectively provides an immediate 9 percent return on up to $4,455 a year for joint filers, provided the proceeds are reinvested in the plan instead of pocketed and spent elsewhere.
It more than covers the plan's fees. See what I mean by clicking on this spreadsheet:
.
Bottom line:
I've got more on my blog about the
in the plan's age-based portfolios. But for now, know that you can save well for a child's college in this plan, especially if you index.
"I don't want you to get your readers to push any panic button," Settle said. "It's sort of doing what it was set up to do."
--
welcomes questions about his columns or
. Reach him at 503-221-8359.