Parents saving for their children’s college education are apparently so nervous about investing in stocks, bonds and other investments that some firms are offering them the safest option imaginable: a federally insured savings account at a bank.
Fidelity Investments, the Boston financial services giant, said last week that it will offer a bank account option in five college savings plans it manages, including the Massachusetts U.Fund College Investing Plan. Fidelity also will offer the option in its other tax-advantaged college savings products, called 529 plans, in New Hampshire, California, Delaware and Arizona, that it markets directly to customers.
Like most investment firms, Fidelity already offers customers in 529 plans a conservative money market option that is intended to preserve investors’ money. The funds have traditionally been considered as safe as checking accounts.
But unlike bank accounts, money markets are not insured by the Federal Deposit Insurance Corp. And the 2008 financial crisis was so severe that one well-known money market fund, the Reserve Primary Fund, “broke the buck” — meaning its shares fell below the $1 threshold and customers lost a portion of their savings.
By contrast, the FDIC guarantees bank accounts up to $250,000 each.
“There are some investors that want the peace of mind in knowing they are investing in an option that has a guarantee of principal,” said Joe Ciccariello, vice president of Fidelity’s college planning group. Fidelity is offering the bank account through a partnership with Wells Fargo, one of the nation’s largest banks.
Even after the losses of the financial crisis, most parents still invest in age-based funds that own stocks and bonds, shifting to a more conservative mix as their children edge closer to college, Fidelity said. Just 5 percent of the $16 billion Fidelity manages in college plans is in money markets and other conservative options, which are less volatile than stocks and bonds but historically produce smaller returns.
Both money market funds and bank accounts are offering record-low interest rates. Fidelity said it initially plans to offer 0.19 percent interest on the bank account. And it is offering 0.01 percent interest on its money market fund. Both rates are expected to improve when interest rates rise.
Ciccariello said only a handful of other college savings plans offer an FDIC-insured bank account option, including funds in Virginia, Utah and Arizona. But he said the company thought there would be interest in the option because nearly half of all parents are saving money in traditional bank accounts — without the tax benefits provided by a 529 account.
A 529 account allows a person to save money for college without having to pay federal taxes on the earnings, and some states offer other tax benefits. Families have $123 billion in college savings plans nationally, according to the College Savings Foundation, a Washington nonprofit.
The Vanguard Group, another major player in the college savings market, does not offer bank account options for the five 529 funds it manages. Instead, it offers a conservative fund, similar to a money market, but with a different mix of investments, including contracts with insurance companies, to offer better yields, said Ed Ferko, senior manager in Vanguard’s education savings group in Valley Forge, Pa. That fund is yielding about 0.55 percent interest.
Though not guaranteed, the “risks are minimal,” Ferko said.
Separately, Vanguard said last week that it would cut by nearly half the fees it charges for its main 529 college savings plan, offered through the state of Nevada but open to investors nationwide.
