Virginia state-run college savings programs have failed to meet a majority of their investment performance benchmarks, according to a legislative audit released Monday.
The report by the Joint Legislative Audit and Review Commission assessed valuations and returns through the end of the first quarter, March 31.
The programs are used by families to save tax-advantaged money to pay for primary, secondary and higher education costs. At a JLARC meeting on Tuesday, officials acknowledged that underperformance translates into less savings for these families. The global program, Virginia529, is the largest of its kind in the country, “with $97.2 billion in assets and a 21
percentage of domestic market share as of March 31, 2022,” JLARC reported.
In the case of the 529 defined benefit fund – worth $3.1 billion – JLARC cites the “defensive stance” of investment fund managers to mitigate inflation and high interest rates, as well than volatility and market downturns, to explain the less-than-expected growth that was concentrated in public equities and fixed-income assets. However, the 529 defined benefit fund still has enough assets to continue to meet its payment obligations.
As of March 31, the fund fell short of its 3-year, 5-year, and 10-year horizon return benchmark and returned -3.4% year-to-date, exceeding the target of -1.9%. . The fund has underperformed for a few years in “strong market conditions and bear markets,” which the report calls worrying.
In a defined benefit savings plan, participants purchase contracts that will cover the expected cost of tuition and fees based on a weighted average tuition fee.
Defined contribution plans, in which individuals contribute to the plan and exercise discretion over their asset allocation similar to a 401(k), such as the state-run Invest529 and advisor-run CollegeAmerica, have also mostly fell short of their target rates of return. The Invest529 fund, totaling $7.6 billion, “generally underperformed long-term and short-term benchmarks” because individual managers failed to hit their benchmarks, according to JLARC.
Virginia529 staff have made changes to the 529 defined benefit fund that they believe will increase the fund’s performance, including moving from an active to a passive strategy for public equities and reallocating investments in certain types of bonds. A new chief investment officer was also hired last month, JLARC notes.