Kansas residents saving for their children’s college education are getting an education in the process.

They’re learning the stock market doesn’t discriminate. It will take your money whether you are investing it for little Johnny’s four years at Kansas University or your two-week vacation to the Bahamas.

They’re also learning that Kansas’ only state-sponsored college education savings plan, Kansas Learning Quest, is no place to hide from a down stock market. In fact, according to an analysis done by the Journal-World, the 12-month plan has been one of the toughest in the country for investors to make money.

According to data from every state-sponsored college savings plan in the country, the Kansas program ranked 36th out of 43 states in terms of the top rate of return it provided its investors during a 12-month period, ending March 31.

The Kansas plan is made up of 22 different funds. During the 12-month period, only one of the funds had produced a positive rate of return. The plan’s “short term portfolio” produced a rate of return of 0.19 percent.

Other states

The Kansas Learning Quest program is like many other state-sponsored college savings programs. Technically, they are called 529 plans, named after a section of the federal tax code. Their basic reason for existence is because they give parents, grandparents or other family members a way to pay for a child’s education and receive significant tax breaks in the process.

Basically investors put money into the plan when their children are young. The money is invested in a program overseen by the state. When the money is needed for college expenses, the investors can withdraw the money without paying any federal or state taxes on the earnings.

In Kansas, the program is run by the Kansas treasurer, but the office contracts out the management of the money to Kansas City, Mo.-based American Century, which is a major mutual fund company.

The Kansas plan does have at least one major difference than many other state plans. It doesn’t offer any funds that investors can consider safe havens during troubled markets.

Garth Terlizzi, a broker with Lawrence’s Linsco Private Ledger Financial Services, said he likes the Kansas program but did acknowledge that it might not be for the faint of heart.

“American Century has a pretty good record over the years, but they’ve mostly achieved that pretty good record by being aggressive,” Terlizzi said. “Being aggressive hasn’t been a very successful strategy over the last few years.”

Specifically, American Century has been so aggressive that it hasn’t offered investors in the plan the option of investing their money in a pure bond fund, or a pure certificate of deposit fund, both of which have performed better than traditional stocks or mutual funds.

That’s a different strategy than other states have taken. Colorado, for instance, offered a fund of bonds and CDs that earned 11.04 percent during the 12-month period. In total, 17 of the 43 states offered at least one fund that returned over 5 percent during the 12-month period.

To put in perspective how low 0.19 percent is, according to rates from area banks last week, Lawrence investors could have guaranteed themselves a return of at least 2 percent on their money by investing in a simple bank CD.

American Century spokesman Chris Doyle said there was a good reason the fund was set up that way. He said college costs were rapidly increasing, and if young families hope the fund will produce enough to pay for their child’s education years down the line, it needs to be fairly aggressive.

He also said since March 31 the market has improved and some of the more aggressive funds in the plan now have returns over 10 percent.

Changes coming

The Kansas Treasurer’s office has heard complaints from investors. Ryan Wright, a spokesman for Kansas Treasurer Lynn Jenkins, said the office has heard from consumers who say the program needs a more conservative option to park their money during down times.

Wright said the office currently is in discussions with American Century to add a fund that is designed to produce a more stable rate of return.

“The reasoning behind it is pretty simple,” Wright said. “With the state of the markets the way they are, everyone is concerned about their investments.

“People have told us they want more of a guarantee. You can’t guarantee anything with the markets, but bonds are a more stable investment, and that’s the direction we want to go in. We’ve told American Century that.”

Wright said the company and the treasurer’s office are working on a plan that would give investors more opportunities to be a hands-on manager of their money. Under current rules, investors basically are allowed to make only one change to their investment allocations per calendar year.

Wright didn’t have a date for when the changes may take affect, but he said the process “is pretty far along.”

Looking around

If people don’t want to wait for the changes, they have another option. Most states allow nonresidents to invest in their plans. In other words, a Kansas resident could invest in a plan in Colorado.

“I think there is a lot of confusion about that,” Peggy Johnson, an adviser with Lawrence’s American Express Financial Advisors, said. “People think they have to do Kansas’ plan because they live in Kansas.

“I tell people they definitely want to explore the Kansas plan, but they should look at the flexibility that other state plans offer.”

Investing in another state’s plan doesn’t mean parents have to send their child to a school in that state. People who invest in Kansas’ plan, also are under no obligation for their children to attend a Kansas school.

Dan Dechant, the branch manager for the Morgan Stanley offices in the Lawrence area, estimated that about 50 percent of his company’s clients choose to go to another state plan.

But there is a good reason for Kansas residents to strongly consider staying in state. Kansas residents can deduct part of their yearly contributions to the plan from their taxable income. For single residents, the deduction is $2,000 per year. For a married couple, it is $4,000.

“That’s the kicker,” Dechant said. “If you go outside the state you don’t get the deduction. For some people that can be an incentive to stay, but we tell people they still need to weigh their options.”

Investors also should closely check the management and expense fees each state charges plan participants. Sometimes the management fees are higher for nonresidents.

Preaching patience

Investment professionals, though, caution people about putting too much credence into the performance of their college savings account at the moment.

“I wouldn’t be worrying about the rate of returns right now,” Johnson said. “If you have a child that is 13, 14, 15 years away from going to college, you need to be in a more aggressive fund.

“If people (in the Kansas plan) would have had bond and money market funds to go to, would they have made the changes? I don’t think they would have known when to make the changes. I think, unfortunately, a lot of people would have bought high and sold low. Out-guessing the market doesn’t work very often.”

But still, it must be hard for the plan’s investors to swallow the medicine they’ve been given thus far. The Kansas Learning Quest program got started in mid-2000, which was about the time the stock market began to tumble.

For the life of the program, the average rate of return on all 22 funds has been a loss of approximately 7.9 percent. Wright said that is less than the loss the S&P 500 index has posted during the same period, so the office feels that the investments are being well managed.

Wright said the department currently has no plans to replace American Century when its contract expires in 2006.

“We’re always going to keep our options open because it is important to us to make sure the citizens are getting the best deal they can,” Wright said. “Right now we feel like they are.

“We just tell people it truly comes down to patience. You have got to ride this through.”