Another inexpensive advisor-sold plan earned a Silver: Arkansas' iShares 529 Plan
. As its name suggests, the plan includes only exchange-traded funds, which are inexpensive replications of indexes that trade like individual stocks. ETFs have become a popular addition
to 529 plans, but iShares has been a pioneer in the ETF-only trend in 529s and has a strong cost-benefit profile.
Laura Lutton is North American practice leader, manager research, for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc.
The remaining two Silver medalists, CollegeAdvantage 529 Savings Plan
of Ohio and Michigan Education Savings Program
, are both direct-sold plans with solid, inexpensive options. CollegeAdvantage mixes managers and investment styles from a number of firms, giving college savers a nice variety of options to consider, all at a fair price. Meanwhile, the Michigan plan offers mostly indexed options run by TIAA-CREF and historically has been a good deal. The plan will cut its fees further in 2013 to become one of the cheapest plans in the nation.
The list of plans earning Bronze medals is quite long, as it reflects the broad improvement in investment quality and price across the 529 industry. All of the Bronze-rated plans have well-executed strategies at a fair price. Often what separates a Bronze plan from a Neutral plan are the state's tax benefits. For example, Georgia's Path2College 529 Plan
offers competitively priced options that are made more attractive by the state's income tax deduction on $2,000 of contributions annually. The tax benefits--coupled with a strong plan--make it likely that investors will do better than standard market returns.
The bulk of the Morningstar Analyst Ratings issued today are Neutral. The 33 plans earning this rating are not seriously flawed, but in Morningstar's view, they're unlikely to exceed market returns over a full market cycle. College savers who choose a Neutral-rated plan should expect marketlike returns, which is a reasonable outcome. But for those in states with no local tax benefits, it may be worth upgrading to a top-rated plan.
- source: Morningstar Analysts
Off the Mark
Just four plans earned Negative ratings from Morningstar in 2012. The two plans in Rhode Island's 529 program, CollegeBoundfund (Direct Sold) and CollegeBoundfund (Advisor Sold), have been in Morningstar's basement in the past. Both plans predominantly feature investments from AllianceBernstein, which has struggled on the performance side. The direct-sold plan does contain a handful of sensible Vanguard index funds available only to Rhode Island residents, but the age-based track--popular among do-it-yourselfers--is run by AllianceBernstein.
High fees dull Minnesota College Savings Plan
. There's nothing wrong with the quality of this plan's indexed investments from TIAA-CREF--they just cost too much. The price tag is especially stinging in light of Minnesota's 2010 decision to withdraw a state grant for college savers.
Schwab 529 College Savings Plan
also has been hindered by too-high fees. This plan, which is managed by American Century but is distributed and branded by Schwab, has some high-quality strategies like Gold-rated PIMCO Total Return
. But the expense ratios on the options are so high that they make it very unlikely that the plan will outperform over the long term.
- source: Morningstar Analysts
New Ratings Scale for 2012
The 2012 ratings for 529 plans use the same scale as does the Morningstar Analyst Rating for funds, which was introduced in 2011. Both Analyst Rating methodologies consider the same five factors to arrive at the final rating, though the 529 ratings reflect the quality of the entire plan, not a single investment, as is the case for the fund rating. To arrive at an Analyst Rating for 529 plans, analysts consider:
- People: Are the managers and researchers directing the plan's investments skilled and well-supported?
- Process: Are the strategies sensible and are past successes likely to be repeated? Are the asset-allocation and fund selection for the age-based options based on solid research and implemented well?
- Parent: Is the program manager a good caretaker of college savers' capital? Is the state managing the plan professionally?
- Performance: Has the plan delivered strong risk-adjusted performance, and is it likely to continue?
- Price: Are the investment options a good value? Do state tax benefits defray costs?
In 2011, the Morningstar Analyst Rating for 529 plans employed the same methodology, but the overall rating was expressed as Top, Above Average, Average, Below Average, and Bottom.