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But before you do anything, consider the following for some perspective. Let's go back in time to May 2013, when interest-rate concerns also were running high because of fears that the Fed would soon begin tapering its bond-buying stimulus program. Rates climbed throughout the summer, and for the year the Barclays Aggregate Bond Index, a proxy for the U.S. investment-grade bond market, lost 2% of its value. By comparison, funds in the Age 13–18 Low Equity category actually gained 1.62% (the category includes conservatively invested age-based portfolios designed for 529 beneficiaries between the ages of 13 and 18 and currently averages a 66% allocation to bonds and a 10% allocation to stocks, according to Morningstar data). Not great, but hardly the disaster some had feared amid a rising-rate environment.
Interest rates have actually been declining in 2014, meaning that you may have been better off holding intermediate- and long-term bonds than stocks. Of course, rates could very well go up in the coming year, and 529 account holders with heavy allocations to bonds could see losses. But the larger point is that interest rates don't move in a straight line, and predicting their near-term direction (and thus their effect on bond prices) can be just as difficult as predicting that of stocks.
However, if you still wish to reduce the interest-rate risk of your 529 holdings, there are steps you can take. One would be to move the bond portion of your portfolio to a short-term bond option, if your plan offers one (short-term bonds are more immune to interest-rate movements than longer-term bonds), or perhaps to cash. If you've been using an age-based portfolio, this might require you to move assets out of it and create your own customized allocation using the plan's pure-stock-fund and pure-cash-fund offerings. But that might be the only way you can completely remove bonds from the equation.
Although there's no imminent reason to worry about a rise in interest rates wreaking havoc on the bond portion of your 529 portfolio, investors with heavy allocations to bonds still would be well-served in taking a peek under the hood just to see what's there in terms of interest-rate sensitivity. If what you find makes you uncomfortable, consider the aforementioned actions of reconfiguring your portfolio. If not, at least now you know what to expect if and when rates do rise.
529 plans are tax-deferred college savings vehicles. Any unqualified distribution of earnings will be subject to ordinary income tax and subject to a 10% federal penalty tax. Tax law is ever-changing and can be quite complex. It is highly recommended that you consult with a financial or tax professional with any tax-related questions or concerns. An investor should consider the investment objectives, risks, and charges and expenses associated with municipal fund securities before investing. More information about municipal fund securities is available in the issuer's official statement, and the official statement should be read carefully before investing.
Indexes are unmanaged and not available for direct investment. Past performance does not guarantee future results. Investments in securities are subject to investment risk, including possible loss of principal. Prices of securities may fluctuate from time to time and may even become valueless.