A Morningstar analyst says 2008 was “terrible” for 529 plans.
“In recent years, the industry made strides by lowering fees, improving investment options, and closing down poorly structured plans,” said Greg Brown, mutual fund analyst for Morningstar in a statement. “Last year, however, we saw too many plans that were overly aggressive with their investment strategies as students approached college, and plans that stayed loyal to strategies that just weren’t working.”
Morningstar issued its sixth annual study of the best and worst 529 plans Thursday. The investment research company’s study of 529 plans focuses on several areas: the underlying funds, expenses, diversification, asset allocation and flexibility.
Morningstar evaluates the quality of the underlying investments by looking for funds with experienced managers, a history of good stewardship, and sensible strategies. Low expenses, which Morningstar has found to be among the best predictors of a mutual fund’s long-term success, are essential, according to the company.
Morningstar analysts look for diversification across the major asset classes as well as an allocation between stocks, bonds, and cash that is appropriate for the students’ ages. Morningstar also likes to see flexibility for investors with different needs, time horizons, and levels of risk tolerance, including age-based options with differing levels of risk and fixed-allocation offerings in which the level of stocks, bonds, and cash do not change over time.
The following are the best and worst: