A new wave of losses is hitting 529 college savings plans.

Assets in 529 plans have been growing since the beginning of 2009, based in large part on a rebounding stock market. Now, they are experiencing their first significant dip in returns in more than a year, exposing their sensitivity to the market's swings.

For many, the setback recalls the damage suffered by many 529 plans in 2008 and raises questions about whether parents saving for their child s college education should brace for another round of losses.

In the second quarter, assets in 529 plans dropped by 5% to an estimated $117 billion, according to the Financial Research Corporation, which tracks 529 plan performance. Most of those losses were a result of the downturn in the financial markets, says Paul Curley, a research analyst at FRC. The second quarter marks the first loss in 529 plans' assets under management since the first quarter of 2009, when assets stood at $85.9 billion and began rising steadily.

Investors appear skittish about the reversal. During the second quarter, they sunk $1.9 billion into 529 plans, down from $3 billion during the previous quarter. Given the volatility in the market, they re not alone in their nervousness: Investors in equity mutual funds withdrew $17.2 billion during the second quarter, after adding $25.9 billion the first quarter, according to Investment Company Institute, a trade group.

But at least for 529-plan investors, the anxiety might be misplaced. The plans continue to offer tax advantages, principal-guaranteed investment options like certificates of deposit, and declining fees. Another argument for staying the course: Even though 529-plan assets were down during the second quarter, they significantly outperformed the benchmark S&P 500 index, which fell 12%.

Investors who are concerned about their risk exposure in 529 plans have two choices. They can reallocate their portfolio by minimizing their exposure to equities. Typically, this strategy is better for students closer to college age than those in elementary school who have a long-term investment horizon and can bounce back from market losses.

The other option is to shop around for a new plan that offers a more diverse fund selection and lower fees. Once you ve chosen a new 529 plan, you ll need to roll over the balance from your original plan. (To do this, ask your new 529 plan account manager to request the rollover or withdraw the funds from your current 529 plan and redeposit them into your new one within 60 days.)

Parents should keep in mind that they re only permitted to make changes to their 529 plan (whether it s changing investment options or allocation or rolling over into another 529 plan) once every calendar year.

Here are four tips to managing your 529 plan in volatile markets.

Reallocate your portfolio

Today, age-based portfolios, a mix of equity and fixed-income funds designed to grow more conservative as a student gets closer to college, are the most common way to invest in a 529 plan, says Joe Hurley, founder of SavingforCollege.com, which tracks 529 plans. However, parents should keep a closer eye on their investments and how they re performing. In 2008, these portfolios came under scrutiny when many were found to be too exposed to equities as much as 90% for beneficiaries who were just a year away from college.

In the current atmosphere the Dow Jones Industrial Average is more than 7% off its year-to-date peak of 11205 on April 26 investors should look at their exposure to equities to determine if they need to dial back. A good rule of thumb is to start transitioning from stocks to fixed income around the time the plan s beneficiary reaches age 10 because he or she has a shorter time to recoup losses from that point on, says Hurley.

Invest in CDs in 529 plans

Investors who are seeking more safety in 529 plans and who want to guarantee that their contributions won t be wiped away by market losses should look at state 529 plans that feature certificates of deposit or a savings or money market account.

Currently, eight states -- Arizona, Colorado, Indiana, Montana, Ohio, Utah, Virginia and Wisconsin -- offer savings vehicles within their 529 plans that are insured by the Federal Deposit Insurance Corporation. Also, North Carolina's 529 state plan features a deposit account, which is insured by the National Credit Union Administration, the independent federal agency that supervises federal credit unions.

The upside of these options is that the principal is guaranteed. However, investors should consider that the interest rates on these accounts are usually lower than the rate at which college tuition increases. For example, in Ohio's CollegeAdvantage plan, a standard five-to-seven-year CD has a 2.5% annual percentage yield, with a minimum required opening balance of $500. However, between the 2008-2009 and 2009-2010 academic years, tuition at public four-year universities increased an average of 6.5%, according to the College Board. Tuition at private universities rose an average 4.4%.

If you are set on going with an FDIC-backed account, one way to potentially increase your rate of return is to include a mutual fund in your 529 plan. You can transfer existing balances within the 529 plan to these savings vehicles while contributing new money into equity funds, says Deborah Fox, founder of the financial-planning firm Fox College Funding.

Shop for a plan with fund diversification

Investors who aren t satisfied with the fund selections or performance of their 529 plan should start shopping for another one.

Begin by looking at the complete fund selection that a 529 plan offers. Ideally, options should include age-based funds as well as individual equity and bond funds because that would provide opportunities for broader diversification, says Aaron Schindler, a certified financial planner and managing director at Wealth Advisory Group, a financial planning firm. In addition, look for diversity among the fund classes. Schindler recommends fund classes focused on emerging markets and commodities two sectors that he says are likely to perform well during moments of volatility and when the economy fully recovers.

Sign up for a plan with lower fees

In an attempt to hold on to current investors and lure new ones, 529 plan providers have been lowering fees. The pricing war picked up steam around December when annual asset-based fees for direct- and advisor-sold 529 plans averaged 0.9%, according to the FRC. That dropped to 0.86% by May 2010. And it seems that the race to the bottom is not yet over.

In August, Vanguard and Upromise Investments slashed administrative fees on their direct-sold 529 college savings plan that they administer for New York by nearly half, bringing the all-in cost of the plan s entire investment lineup to 0.25%, or $2.50 per $1,000 invested. Separately, Alliance Bernstein lowered fees for age-based options in the CollegeBoundfund for Rhode Island to 0.20%, down from a range of 0.72% to 0.94%.

In July, T. Rowe Price cut its program fee by up to nearly a third (amount varies by plan) to 0.20% and its annual account fee by 20% to $20 on all the college savings plans it offers.

And in December, when First National begins administering the Nebraska College Savings Plan, it will eliminate the $20 annual account fee, and annual asset-based fees for the direct plan s age-based and static funds will drop from a high of 1.04% to a high of 0.61%.