November 17, 2011

Best & Worst 529 Plans: Morningstar

Six plans standout, seven have room for improvement

As if finding the right school wasn’t hard enough, finding the right 529 plan might even be harder. After the hit the plans took in 2008, many proud parents of the country’s best and brightest soured on the 529 story. But the plans are making a comeback, and Morningstar helpfully points to the best, as well as those still in need of work.

“As the industry has improved, none of the 529 plans that Morningstar reviewed warranted an Analyst Rating of Bottom, leaving 58 plans rated Top, Above Average, Average, and Below Average,” writes Morningstar’s Laura Pavlenko Lutton. “Six 529 plans represented the industry's highest standards, earning Top Analyst Ratings from Morningstar. Five of the six plans were also rated Top in 2010, with Utah Educational Savings Plan the only newcomer.”

Here are the top plans and what made them stand out, followed by the not-so-top plans:

Man raising the Maryland and U.S. flags

6 Top Plans:

1 & 2)  T. Rowe Price College Savings Plan and Maryland College Investment Plan

T. Rowe-run plans are built upon a chassis of well-executed funds, according to Lutton.

“The age-based options' asset allocation is more equity-heavy than the norm and the expense ratios are higher than other direct-sold plans', most of which contain indexed funds. But college savers are getting an excellent set of actively managed funds run by a very strong, tested team.”

Cleveland's Rock 'n Roll Hall of Fame3)  Ohio's CollegeAdvantage 529 Savings Plan

Lutton writes there's something for everyone in this direct-sold plan from the Ohio Tuition Trust Authority. The plan, she says mixes managers from various firms including Vanguard, PIMCO, Oppenheimer, and GE. That variety is becoming more common among 529 plans, but what's notable here are the plan's low fees.

Las Vegas sign4)  Nevada's Vanguard 529 College Savings Plan

High praise from Lutton for this plan means you won't be gambling with your kid's future:

“This Nevada-based plan features a suite of Vanguard's renowned, well-diversified index funds at some of the industry's lowest prices. To be sure, the plan requires $3,000 to open an account, which is a deal-killer for most college savers. Utah Educational Savings Plan, a Top-rated peer plan, has similar investments without the high minimum contribution.”

BYU test car on the Utah Salt Flats5)  Utah Educational Savings Plan

The best advice might be to go West, now that Utah rings in at the top:

“This direct-sold plan also features Vanguard index funds at now-lower prices. The plan's new set-it-once asset-allocation tool allows savers to dictate a mix of investments to change every year as a child nears college. Not every saver needs that extra capability, however, and the plan's other options are solid.”

Virginia State welcome sign

6)  Virginia's CollegeAmerica

Little surprise CollegeAmerica made the list, considering its primary backer.

“American Funds is behind this Virginia-based plan. It's the nation's largest 529 plan by a long shot, a popular choice among financial advisors who like to mix and match among American's funds in their clients' college savings portfolios. Like the other Top-rated plans, this one is inexpensive and features high-quality investments run by risk-aware, proven investors.”

7 Not-So-Top Plans:

Of course, Lutton then comes to those plans with “issues,” mainly high fees and poor investment choices.

Tomorrow's Scholar College Savings Plan has poor investment choices and The Upromise College Fund 529 Plan “is saddled with high fees.”

CollegeBoundfund of Rhode Island moved up to Below Average from Bottom after the plan beefed up its Vanguard indexed offerings for in-state residents,” she writes. “While this plan is a good choice for Rhode Islanders, most of its beneficiaries live outside the state and are invested in program manager AllianceBernstein's investments. That firm's stewardship profile is weak relative to many other 529 competitors.”

NextGen College Investing Plan is a Maine-based advisor- and direct-sold plan that features a pricey lineup of investment options. Also, she notes that NextGen's program manager, Merrill Lynch Pierce Fenner & Smith, was fined by regulators for not establishing proper supervisory procedures to determine which college savers were suitable for enrollment.

“Also hampered by too-high fees given the investment options or tax benefits are TD Ameritrade 529 College Savings Plan, Schwab 529 College Savings Plan, and Minnesota College Savings Plan, all of which received Below Average ratings.”

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Top 10 lists from AdvisorOne:

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