Advisors would be wise to pay attention to the latest Morningstar ratings of 529 college savings plans, especially to direct client decisions. In October, Morningstar assigned analyst ratings to 62 plans, which represent 97% of assets invested in 529 plans; only four are ranked gold, 13 silver, 13 bronze, 27 neutral and five negative. Nine plans were upgraded, and eight were downgraded from the previous year.
Several factors played into how these plans are judged, including their process (allocator experience, investment options offered), people (underlying money managers’ talent, tenure and resources), parent company, performance and price.
Fees charged are always an important part of the ranking. However, this year higher quality investment lineups as well as progressive glide paths in age-based portfolios have grown in importance.
Ups and Downs
Morningstar “valedictorians” that hold gold star ratings (the first three also carried gold ratings in 2018) include Illinois’ Bright Start College Savings, Virginia’s Invest529, Utah’s my529 and California’s ScholarShare College Savings, which was upgraded from silver this year.
The three plans that retained their Gold rating from last year “continue to distinguish themselves from other plans for their excellent state oversight and program management, best-in-class investment options and thoughtful investment philosophy,” according to Morningstar. (Investors can choose any of these plans regardless of their state of residence.) Specifically, these plans have continued to excel by “innovating in areas where most 529 plans aren’t.”
For example, Virginia’s Invest 529 plan replaced its actively managed REIT “with a combination of two direct real estate sleeves and a passively managed fund to temper volatility.” Likewise, Utah’s my 529 fund enhanced its principal protection options toward the end of the holding period when balances are highest.
For those plans that received silver ratings, four managed by Fidelity were upgraded from bronze due to “phasing out Fidelity’s most expensive age-based options and adding a new blended track that combined active and passive management,” noted Morningstar. These moves resulted in cheaper offerings on average.
One of these is Fidelity’s Arizona College Savings Plan. Another upgrade to silver includes New York’s 529 Program managed by Ascensus and Vanguard, which increased its exposure to international stock and bonds for diversification. The plan is also the fifth cheapest plan (0.13%) of 529 plans covered by Morningstar.
Other upgrades to silver include the Delaware College Investment Plan, Michigan Education Savings Program, Minnesota College Savings Plan, Massachusetts U. Fund College Investing Plan and New Hampshire UNIQUE College Investing Plan.
One fund downgraded from gold to silver was Nevada’s Vanguard 529 College Savings Plan. Stated Morningstar, “Nevada’s fees remain below average but haven’t kept pace with the cheapest plans.”
Two of the more improved funds were the Florida 529 Savings Plan, which rose to bronze from negative, and the Minnesota College Savings Plan that jumped to silver from neutral. According to Morningstar, “Florida wiped the slate clean, lowering fees and smoothing the glide path of its age-based portfolios by reducing the stock allocation 16 times as the beneficiary ages, up from 2018.” They also thought the state had made improvements to its oversight.
Five funds were “flunked out” of the rankings for various reasons. Nevada’s USAA College Savings Plan fell to negative from neutral due to rapid changes: In July 2019, Victory Capital Holdings purchased USAA’s asset management business, including the 529 plan. Victory “promptly” added its managers to the equity funds before the state could vet the changes.
Reduction of fees was key to higher ratings. Said Morningstar, “Plans that haven’t kept pace with the industry’s dizzying fee cuts also look unattractive, and there’s little incentive for even in-state college savers to stay close to home when similar fare is offered at a much more palatable price elsewhere.”
The gallery above shows the highest rated (gold) and lowest rated (negative) plans, according to Morningstar.
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