Boomers putting their kids through college may be surprised to learn that there can be significant differences in the financial returns afforded by the many 529 college savings plans offered by various states.

New ratings recently released by financial research firm Morningstar Inc., Chicago, show that while a number of 529 plans have made significant improvements, some still bear relatively high fees and offer mediocre investment choices, in the estimation of Morningstar analysts.

A number of important developments in 2006 transformed its list of the best and worst plans, much of it for the better, Morningstar says in a report on its ratings.

“Major tax improvements, continued enhancements from new providers and fee reductions at a number of 529 plans show that states are getting serious about providing competitive options for investors,” says Kerry O’Boyle, a Morningstar mutual fund analyst and author of the report.

Enactment of the Pension Protection Act of 2006 was a key change, making tax breaks for 529 plans permanent. Before the PPA was enacted, the tax-free status of earnings on the plans had been set to expire in 2010.

“Now with that uncertainty removed, college savers can invest confidently in 529 plans, knowing that their earnings will remain tax-free into the future,” O’Boyle says.

He notes, too, that 3 states–Maine, Kansas, and Pennsylvania–made important tax concessions by passing legislation to allow deductions on their residents’ contributions to out-of-state 529 plans in addition to the tax deductions already in effect for their states’ own plans.

O’Boyle warns, however, that tax benefits can seem minor if plans carry high fees or offer poor diversification or asset-allocation options.

Morningstar’s 2007 list of top 529 plans is similar to last year’s list, except that the Maryland College Investment Plan run by T. Rowe Price moved ahead of Alaska’s T. Rowe Price College Savings Plan. The Maryland plan advanced after eliminating its enrollment fee and lowering its management fee, among other moves.

Among broker-sold plans, Virginia’s CollegeAmerica, which is the largest 529 plan in the U.S., and Colorado’s Scholars Choice remain on Morningstar’s best list because they have reasonable costs and a long-term focus, according to O’Boyle. In addition, Colorado offers access to the full array of Legg Mason products and expertise, he notes.

In fact, 529 plans in general have improved in recent years, O’Boyle said.

He notes 4 of the plans on last year’s worst list either changed drastically or are no longer available. For instance, Wyoming’s College Achievement Plan merged with Colorado’s plan–one of the best, in Morningstar’s estimation, in 2006. Arizona closed 2 of its highest-priced funds to new investors, while North Dakota exchanged its SAVE offering from Morgan Stanley to a Upromise/Vanguard plan.

The only plans that remained on Morningstar’s worst list this year are the Alabama Higher Education 529 Fund and Nebraska’s AIM College Savings Plan. New entrants on the worst were the Alaska Freedom 529 plan, managed by John Hancock; West Virginia’s Cornerstone SMART529 and Leaders SMART529, run by The Hartford; and Missouri’s recently launched MOST 529 Advisor, run by Upromise. All landed on the list because of high costs and, in some cases, for what in Morningstar’s assessment was a poor choice of basic investments.

In a statement, a spokeswoman for Hancock said the company was convinced its Alaska plan was strong.

“A number of positive aspects [of the plan] were actually mentioned by Morningstar in its report,” the spokeswoman added. “Morningstar was quite positive about our plan, saying, ‘We think highly of the standout lineup of underlying funds from T. Rowe Price, Davis Advisors, PIMCO and others.’”

A spokesman for The Hartford responded to the Morningstar ratings by saying the company’s 529 offerings in West Virginia “provide solid long-term value and a range of product options. A number of our 529 products are highly rated by industry analysts.”

The Hartford plans rate in the middle of the rating scale used by savingforcollege.com, the spokesman notes.

“In addition, the 4 age-based portfolio options in the SMART529 Director program rank in the top quartile compared to peers, according to Morningstar,” the spokesman says.

For its part, Morningstar says it bases its evaluations on what it calls stewardship ratings for each fund’s management, including the fund’s board, its management incentives, fees charged and corporate culture. Morningstar says it judges these factors not only from public filings but also from management’s history of actions and decisions.

Many financial advisors say it is important to evaluate college savings funds before recommending them to investors. Several, however, say they rely on their own assessment rather than Morningstar’s.

Part of the reason is that the fund chosen depends on investor-specific criteria, such as where they live and whether they have state tax incentives available, notes Bard Mulovaney, a financial planner with Financial Council Inc., Annandale, Va.

The founder of savingsforcollege.com says his firm evaluates 529s using its own criteria. “Among other items, we look at program structure, investment options, historical performance, state tax benefits, and fees and expenses,” says Joseph Hurley, who is also senior partner of Bonadio & Co. LLP, Pittsford, N.Y.

Hurley agrees with Morningstar that many plans have made significant improvements in recent years.

“It’s a competitive environment, and plans keeping changing investment menus to improve quality,” he says. “They’re also reducing fees and reducing unnecessary restrictions, such as time limits on how long money can be held in the account.”

“Fees for 529 plans have been decreasing steadily over the past couple of years,” adds Brian Boswell, an analyst with Financial Research Corp., Boston. “There’s a downward trend because fund manager contracts for many states are coming up for renewal. That’s making them become more competitive on fees and investment selections. That’s going to continue.”