In their annual assessment of 529 education savings plans, Morningstar’s manager research analysts reviewed 62 plans that represent 97% of total plan assets — $437 billion as of August.
They recommended 32 plans to which they assigned ratings of Gold, Silver or Bronze; said 23 plans they rated as Neutral were worth considering; and gave Negative ratings to the remaining seven plans, meaning that they are worth skipping.
Morningstar explained that the plans with Negative ratings had significant structural flaws, including a subpar asset-allocation approach or excessively high fees, which make it unlikely that a typical 529 plan participant will receive a compelling investment experience relative to alternatives.
Morningstar noted that fees can depend somewhat on how a plan is distributed. Those that are sold exclusively through financial advisors often layer on commissions to compensate advisors for financial advice.
Today, other compensation models, such as fee-based advice, give investors more freedom to avoid plans with commission charges, which are often bundled into a front-end load or all-in expense ratio rather than reported as a separate line item.
See the gallery for the 529 college savings plans that “flunked out,” according to Morningstar.