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July 24, 2020 at 03:40 PM
Morningstar has announced a new, streamlined framework for rating 529 plans that will no longer differentiate between between advisor-sold and direct-sold plans or between active or passive investment options when determining price ratings.
“Because we’re aiming to identify plans that will outperform peers, and price is a strong predictor of future performance, our enhanced methodology will remove the distribution channel and active/passive/blend distinctions and instead will compare all plans’ fees versus one another,” explains analyst Madeline Hume, on the Morningstar website.
Price will be one of four variables in Morningstar’s new 529 rating system that will debut this October. It will account for 30% of a plan’s rating as will “Process,” which gauges asset allocation and the glide path for age-based portfolios, and “People,” which measures the talent, tenure and resources of money managers and program managers.
A “Parent” rating, gauging only a plan’s state stewardship rather than also the caretaking by program and investment managers, which is the case currently, will account for 10% of 529 plan ratings.
The new rating system will eliminate a separate pillar for performance because Morningstar has found that the four previously mentioned elements — process, people, price and parent — “are the best predictors of future performance of investment strategies, net of fees.
