In my years of guiding families through financial planning, few topics elicit as much hope and simultaneous confusion as saving for college. The 529 plan stands as the most powerful tool for this purpose, but its inner workings are often shrouded in complexity. When clients sitting across from me at a Bank of America branch ask about “Bank of America 529 mutual funds,” I recognize a common misconception. The truth is more nuanced, and understanding this nuance is the key to building a robust education fund. Bank of America does not directly run its own 529 plans. Instead, it acts as a program manager and a gateway. Our journey today is to demystify this relationship, explore the mutual funds that form the bedrock of these plans, and equip you with the framework to construct a portfolio that aligns not with a bank’s branding, but with your child’s future.
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Demystifying the 529 Structure: The State Partnership
The first and most critical concept to grasp is that 529 plans are state-sponsored. Each state designs and oversees its own plan(s). However, states don’t typically manage the day-to-day investments themselves. They hire large financial firms to act as program managers.
This is where Bank of America enters the picture. Through its Merrill Lynch subsidiary, it serves as the program manager for one of the largest and most well-regarded 529 plans in the country: the Virginia 529 College Savings Plan (Invest529). It also manages plans for other states, such as the Maine FAME NextGen 529.
So, when you invest in Virginia’s Invest529 plan through Bank of America/Merrill, you are not investing in “Bank of America mutual funds.” You are investing in a Virginia state plan that is managed by Merrill Lynch. The investment options within that plan are composed of mutual funds from a variety of top-tier fund companies, such as Vanguard, American Funds, DFA, and others, which Merrill Lynch curates and packages into portfolios.
This distinction is paramount. Your choice isn’t “Which Bank of America fund?” but “Which state’s plan offers the best combination of investment options, costs, and potential state tax benefits for my situation?”
The Engine Room: How Mutual Funds Power Your 529 Plan
A 529 plan is a wrapper—a tax-advantaged account. The growth engine inside that wrapper is composed of investment portfolios, which are, in turn, almost exclusively built from mutual funds. The plan’s program manager constructs these portfolios to cater to different risk tolerances and time horizons.
The most common structures are:
- Age-Based Portfolios (Target-Date Funds): This is the default and most popular option for a reason. I often recommend them for hands-off investors. The portfolio automatically shifts its asset allocation from aggressive (heavy in equities/mutual funds) to conservative (heavy in bonds and money market funds) as the beneficiary approaches college age.
- Static Portfolios: These maintain a fixed asset allocation (e.g., 100% Equity, 80/20, 50/50). They require more active management from you to de-risk the portfolio as college nears.
- Individual Fund Options: Some plans allow you to build a custom portfolio from a menu of individual mutual funds. This is for the sophisticated investor who wants precise control.
A Case Study: Dissecting the Virginia Invest529 Plan
Since Bank of America/Merrill manages this plan, it serves as a perfect model for our analysis. Let’s break down what you’re actually investing in.
The Invest529 plan offers several series of age-based portfolios. The “Multi Manager” series, for instance, uses mutual funds from firms like American Funds, Vanguard, and Franklin Templeton.
Example: A 15-Year-Old Beneficiary’s Portfolio
Let’s assume a child who is 15 years old and will enter college at age 18. The age-based portfolio for this child would be in its de-risking phase.
A hypothetical allocation might look something like this:
| Asset Class | Sample Fund Options | Allocation % | Role in Portfolio |
|---|---|---|---|
| U.S. Equity | Vanguard Institutional Index Fund | 35% | Core growth engine |
| International Equity | American Funds EuroPacific Growth Fund | 15% | Global diversification |
| Fixed Income | PGIM Total Return Bond Fund | 45% | Capital preservation & income |
| Short-Term | Money Market Fund | 5% | Liquidity & stability |
| Total | 100% |
This is a simplified example, but it illustrates the core principle: a 529 portfolio is a curated basket of mutual funds. The job of the program manager (Merrill Lynch, in this case) is to select the underlying fund managers and determine the glide path—the schedule for shifting allocations over time.
The Tyranny of Costs: Analyzing Fees in a 529 Plan
This is where I become relentless. In a long-term investment like a 529 plan, costs are not merely a line item; they are a relentless drag on compounding returns. You must understand the two layers of fees:
- Underlying Fund Expenses: The expense ratios of the mutual funds themselves (e.g., the Vanguard fund’s fee).
- Program Management Fee: The fee paid to the program manager (Merrill Lynch) for administering the plan.
These are often bundled into a single total annual asset-based fee.
Let’s do the math. Assume two plans:
- Plan A (Higher Cost): Total annual fee of 0.75%
- Plan B (Lower Cost): Total annual fee of 0.35%
You contribute \text{\$}5,000 annually for 18 years. Assuming a 7% annual return before fees, let’s calculate the final value and the impact of costs.
The annual return after fees for Plan A is: 7.00\% - 0.75\% = 6.25\%
The annual return after fees for Plan B is: 7.00\% - 0.35\% = 6.65\%
The future value of an annuity (annual contributions) is calculated as:
\text{FV} = P \times \frac{(1 + r)^n - 1}{r}
Where:
- P is the annual payment (\text{\$}5,000)
- r is the interest rate per period
- n is the number of periods (18 years)
Plan A Future Value:
\text{FV}_A = \text{\$}5,000 \times \frac{(1 + 0.0625)^{18} - 1}{0.0625} \approx \text{\$}159,570Plan B Future Value:
\text{FV}_B = \text{\$}5,000 \times \frac{(1 + 0.0665)^{18} - 1}{0.0665} \approx \text{\$}167,220The Cost of Higher Fees: \text{\$}167,220 - \text{\$}159,570 = \text{\$}7,650
That’s \$7,650 lost to higher fees—enough to cover a year of textbooks, lodging, and more for your child. This is not trivial. It is a central determinant of your plan’s success.
The State Tax Advantage: A Crucial Consideration
Many states offer a state income tax deduction or credit for contributions to their own 529 plan. This is a powerful incentive that can immediately boost your effective return.
Example:
If you live in Virginia and contribute \text{\$}10,000 to the Invest529 plan, you can deduct the full amount on your state income tax return. Virginia’s top marginal tax rate is 5.75%.
Your state tax savings would be: \text{\$}10,000 \times 0.0575 = \text{\$}575
This means your net out-of-pocket cost for the investment was only \text{\$}10,000 - \text{\$}575 = \text{\$}9,425. You immediately have \text{\$}575 more working for you from day one.
The Critical Rule: You are almost always best served by starting your search with your home state’s 529 plan to capture this tax benefit. Only if your state offers no tax benefit, or if its plan has exceptionally high fees and poor investment options, should you immediately look elsewhere.
Bank of America’s Role: Execution and Advice
While Bank of America may not “have” its own funds, its role is significant.
- Merrill Lynch Advisors: If you work with a Merrill financial advisor, they will likely recommend the plans they program manage (like Virginia’s or Maine’s). They can provide valuable guidance on selecting the right portfolio and contribution strategy.
- Merrill Edge Self-Directed Platform: You can easily research and invest in any state’s 529 plan through this platform. This allows you to compare and choose the best plan nationally if your state’s tax benefit isn’t a factor.
My Actionable Framework for Choosing a 529 Plan
I advise my clients to follow this decision tree:
- Check Your State’s Tax Benefit: Does your state offer a deduction for contributions to its plan? If yes, your default choice should be your in-state plan. Proceed to step 2 to ensure its fees are reasonable. If no, you are a “free agent” and can choose the best plan nationally.
- Scrutinize the Fees: Compare the total annual asset-based fees of your in-state plan to highly-rated, low-cost plans from other states like New York’s 529 (managed by Vanguard) or Utah’s my529 (known for low costs). If your in-state plan’s fees are significantly higher (e.g., >0.50%), the tax benefit may not cover the excess cost over 18 years. Do the math.
- Evaluate the Investment Options: Look for plans that offer low-cost, broad-market index funds from providers like Vanguard, Schwab, or iShares. Examine the glide paths of the age-based portfolios. Do they become too conservative too quickly for your taste?
- Execute: Open the account, either directly with the state plan or through a brokerage platform like Merrill Edge for convenience. Set up automatic contributions to harness dollar-cost averaging.
Final Counsel: You Are the Architect
The “Bank of America 529” is a misnomer, but the access and services provided by the bank are real and valuable. Your task is to see past the branding. You are not buying a product from a bank; you are hiring a program manager (like Merrill Lynch) to execute a state-sponsored strategy.
Your most powerful levers are the state tax code and the relentless math of compounding costs. Focus on these elements with the same intensity you would apply to choosing a college. By understanding that you are building a portfolio of mutual funds within a tax-advantaged structure, you take control of the process. You move from being a customer to being an architect—designing a foundation strong enough to support the immense weight of a child’s dream.
