More On Tax Planningfrom The Advisor's Professional Library
- IRAs: In General Individual Retirement Accounts are highly popular tools for contributing funds that grow on a tax deferred basis. Depending on the type of IRA, the accumulation can be tax free.
- Charitable Giving Charitable giving can reduce your clients’ tax liabilities. However, the general and verification rules for the deduction of charitable gifts must be understood in order to take full tax advantage of such gifts.
Morningstar this week named the best and worst 529 college savings plans for 2012 and granted gold, silver or bronze medals to the 27 plans that were most likely to outperform their peers. Only four of the 64 plans rated earned negative ratings.
This year, the 529 plans that earned medals are a diverse group of both direct-sold and advisor-sold plans, all with a strong menu of investment options, solid management and reasonable fees, wrote Laura Pavlenko Lutton, director of fund-of-funds research, in a comment for Morningstar.
What’s striking this year is the big pool of winners, a reflection of the improvement in the 529 industry since it hit bottom in 2008—and seven of the 27 medalists are advisor-sold.
“The relatively large number of plans earning medals reflects meaningful improvements across the 529 industry in recent years,” Lutton wrote. “Very few plans still include options that have performed poorly due to weak management or extremely high fees.”
However, notes Morningstar mutual fund analyst David Falkof, 529 plans still have a long way to go in terms of transparency.
“A new Morningstar study of 529 plans' disclosure found that the typical 529 plan website and plan document provide only high-level descriptions of the investment options,” writes Falkof in a “Fund Spy” comment. Basic information—including the name and tenure of the portfolio managers running the 529 investment options, and details about the most recent portfolios—isn't required disclosure for 529 plans, even though 529 plans collectively invest more than $162 billion of college savers' capital.
A total of 33 plans earned neutral ratings, while another 22 of the industry’s smallest plans were not considered.
Read on to learn more about the gold, silver and bronze winners along with the plans that scored negative ratings:
(Read about Morningstar’s 2011 ratings of the best and worst 529 plans at AdvisorOne.)
-- Alaska’s T. Rowe Price College Savings Plan
-- Maryland’s College Investment Plan
-- Utah Educational Savings Plan
-- Nevada’s Vanguard 529 College Savings Plan
Both the Alaska and Maryland gold medal winners feature T. Rowe Price's “topnotch” investments, says Laura Pavlenko Lutton in her Morningstar comment. However, none of the gold medalists are advisor-sold.
“Morningstar has identified these plans as industry leaders for several years running because they offer high-quality active strategies at a reasonable price. The plans were largely unchanged in the past year, though each plan's single age-based track now features more international equity and real-assets exposure, which should further diversify the plan's returns,” she writes.
The other two plans earning gold medals feature passive investments from Vanguard. “To be sure,” Lutton notes, “indexing is increasingly common in direct-sold 529 plans like these, but fees vary dramatically from plan to plan.”
-- Arkansas iShares 529 Plan, with Upromise Investments Inc. as program manager
-- Michigan Education Savings Program from TIAA Tuition Financing, Inc.
-- CollegeAdvantage 529 Savings Plan from the Ohio Tuition Trust Authority
-- Virginia’s CollegeAmerica from American Funds
Advisors take note: While none of the gold medal winners are advisor-sold, two of the 529 college savings plans that won Morningstar’s silver medal included some that are advisor-sold.
“Virginia’s CollegeAmerica, the nation’s largest 529 plan at $33 billion of assets, is advisor-sold and managed by American Funds,” Lutton writes.
Another inexpensive advisor-sold plan earned a silver: Arkansas’ iShares 529 Plan, which includes only exchange-traded funds (ETFs).
Morningstar’s complete listing of 529 college plan winners numbers 19 bronze medalists, five of which are advisor-sold plans:
-- Colorado’s Scholars Choice -- College Savings Program from Legg Mason Global Asset Allocation
-- South Carolina’s Future Scholar 529 (Advisor) from Columbia Management Investment Distributors Inc.
-- Oregon’s MFS 529 Savings Plan
-- Indiana’s CollegeChoice Advisor 529 Savings Plan from Upromise Investments Inc.
-- Illinois’ Bright Directions College Savings Program from Union Bank & Trust Co. of Lincoln, Neb.
All of the advisor-sold silver and bronze medalists are for both residents and non-residents.
Four 529 college savings plans were off the mark, earning negative ratings from Morningstar in 2012, and one of them was advisor-sold:
-- Rhode Island’s CollegeBoundfund (Advisor Sold), AllianceBernstein LP
-- Rhode Island’s CollegeBoundfund (Direct Sold), AllianceBernstein LP
-- Kansas’ Schwab 529 College Savings Plan from American Century Investment Management
-- Minnesota College Savings Plan from TIAA Tuition Financing Inc.
“The two plans in Rhode Island's 529 program, CollegeBoundfund (Direct Sold) and CollegeBoundfund (Advisor Sold), have been in Morningstar's basement in the past,” Lutton writes. “Both plans predominantly feature investments from AllianceBernstein, which has struggled on the performance side.”
As for the Minnesota plan, high fees tarnished its rating.
“There's nothing wrong with the quality of this plan's indexed investments from TIAA-CREF—they just cost too much. The price tag is especially stinging in light of Minnesota's 2010 decision to withdraw a state grant for college savers,” Lutton says.
The Schwab Kansas plan also has been hurt by high fees, with the expense ratios on the options “so high that they make it very unlikely that the plan will outperform over the long term,” according to Lutton.
Read about Morningstar’s 2011 ratings of the best and worst 529 plans at AdvisorOne.
Check out AdvisorOne's College Special Report 2012 home page.