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Best 529 College Savings Plans (from Morningstar)

Best College Savings Plans

I began using the  529 College Savings plans for my kids since nearly 10 years ago.  My first advice came from a CPA Mom Friend who had done exhaustive research on the existing 529 plans for her own child.  I just copied her and went with the NY plan even though I live in Massachusetts. (NOTE that you need to read the fine print when you go out of state as there may be additional rules as to how the money may be spent.  

There may be in-state tax benefits as well.)  The plan did not perform very well and a Preschool Dad Friend who worked for MFS (Massachusetts Financial Services, inventors of the mutual fund) said that he had gone with in-house products for his child who is the same age and he was quite pleased with his returns.  That was pretty depressing news!

So I did more research and went with Alliance Bernstein, then the #2 performing plan who ran the 529 plan for the state of Rhode Island.  The number 1 plan, if you were out of state, was only available through a professional financial advisor.  My new 529 plan did not hold up during the recession, though most did not.

Fast forward to hiring a financial advisor about two years ago after years of interviewing candidates and companies.  She has a different approach for college savings and invests the money into mutual funds that she selects and actively manages within a 529 Plan.  This is not a good strategy for ME if I were doing it myself because I simply don’t spend enough time nor know enough to manage the money actively and successfully (and I have an MBA from UCLA).

What would I advise?  A financial advisor is a good option if you are willing and able to 1) spend the money and 2) do exhaustive research to find a good one.  Do I really need a financial advisor?  Yes and no.  I relied on research from Morningstar as my guiding light during the time I was on my own, but, at the end of the day, investing is not my full time job and that is what my financial advisor spends the majority of her waking hours on.

If you are a do-it-yourselfer investor, you might want to look over this list.  The entire article is here.  The Best 529 College Savings Plans, according to Morningstar,  are belo1

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Laura Pavlenko Lutton is an editorial director in Morningstar’s fund research group. She would love to hear from you, but she can’t give portfolio advice.
Morningstar’s seventh annual study of 529 college-savings plans is based on months of research into more than 50 of the largest 529 college-savings plans that together represent 94% of the industry’s $176 billion of assets. Morningstar’s mutual fund analysts studied detailed comparisons of the plans’ asset allocations, underlying investments, returns, fees, stewardship practices, and tax incentives. The team also discussed investment strategies with the plans’ program managers and talked with the states’ representatives to determine how they oversee, market, and administer their 529 plans.
Here’s what made each of the Top plans stand out:
T. Rowe Price College Savings Plan and Maryland College Investment Plan
Thoughtful Management: Both of these plans are sold directly to college savers (not through a financial advisor) and are run by T. Rowe Price. They feature nearly identical asset allocation and underlying funds. These are two of the few direct-sold 529 plans that emphasize actively managed funds, rather than index funds. As a result, college savers pay more than they would for an indexed-only plan, but they’re getting a strong set of funds run by experienced managers. T. Rowe Price has used this lineup well elsewhere, including in the firm’s target-date funds, which also earn Morningstar’s Top Analyst Rating.

CollegeAdvantage 529 Savings Plan
Low-Cost All-Star Team: This 529 plan, managed by the Ohio Tuition Trust Authority, mixes sought-after money managers from a number of firms. Vanguard runs a set of age-based indexed options, while another track of investments mixes active managers from PIMCO, Vanguard, Oppenheimer, and GE, along with some Vanguard index funds. Morningstar has found it’s usually more expensive to offer multiple firms’ strategies in a single 529 plan, but this plan’s total expenses are among the lowest for their respective strategies.

The Vanguard 529 College Savings Plan
Cheap Indexed Options: The cost of buying index funds in 529 plans went way down in 2010 when Fidelity first announced steep fee cuts within the plans it manages, particularly among indexed options. Vanguard–the industry’s leader in indexing strategies–has followed suit, though not for every plan it manages. The Vanguard 529 College Savings Plan, sold through the state of Nevada, features an expense ratio of 0.25% on its age-based options, making it a top choice for college savers. If the $3,000 minimum investment for this plan is too steep, New York’s 529 College Savings Program (Direct), another Vanguard-run, direct-sold suite of indexed options, charges the same but requires just $25 to get going. The New York plan, however, lacks international exposure in the age-based tracks.

CollegeAmerica
Steady-Eddie Investments: This Virginia-based plan is the nation’s largest, and it’s no wonder why. American Funds, a broker-sold family of funds known for its patient, risk-aware investing style, offers its complete lineup here for advisors to mix for their clients. Many broker-sold 529 plans are significantly more costly than their namesake mutual funds, but these are barely higher, and the funds’ long-term records are enviable.

Some Plans Have Shortcomings
Not surprisingly, the plans that didn’t earn passing marks from Morningstar–those with Below Average and Bottom ratings–fall short where the best plans excel. Two of the three plans earning Below Average ratings are mostly indexed options that now look too expensive relative to the now-lower fees on indexed options from Fidelity and Vanguard. Georgia’s Path2College 529 Plan is run by TIAA-CREF and charges nearly twice as much as The Vanguard 529 College Savings Plan’s 0.25% per year. The same is true of The Upromise College Fund 529 Plan, which also hails from Nevada and is a clone of The Vanguard 529 College Savings Plan but charges double.

The other plan with room to improve is Tomorrow’s Scholar College Savings Plan, one of two broker-sold plans based in Wisconsin. It’s rated Below Average because the plan’s investment options, which are mostly from Wells Fargo, together have turned in some of the worst risk-adjusted performance relative to similar peers. The plan’s asset-weighted expenses are also high.

The only plan to get Morningstar’s Bottom rating, CollegeBoundfund of Rhode Island, also has a poor long-term track record, but of greater concern is personnel turnover at program manger AllianceBernstein. The firm was hard-hit during the 2008 market downturn. Since then, investors and AllianceBernstein’s own personnel have voted with their feet. Many of the funds have been in net redemptions, and key personnel–including several chief investment officers–have left the firm. There are a few bright spots in the organization, but they’re not enough to instill confidence that the firm is back on solid footing.

Want to know how your 529 plan compares? Morningstar.com’s new 529 research center features exclusive data comparing 529 investment options’ asset allocation as well as Morningstar Ratings for 529 investment options with at least three years of performance. (Unlike the Analyst Ratings for 529 plans, these are quantitative ratings modeled on the star rating for mutual funds.) Premium Members of Morningstar.com can read Morningstar’s analyst research on more than 50 plans and  search for top-rated plans. Haven’t tried Premium? Sign up free for 14 days.

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By Mia Wenjen, PragmaticMom

3 Comments

  1. A Dad Friend left this comment on Facebook and said that it was ok to post on the blog:

    “Just my two cents worth (I wish it was $2M worth), but none of the 529 plans have performed over the past ten years to even warrant an investment. We did both for out daughter. We put some money in a 529, and also took the “put it into a good mutual fund” advice. Earning double the returns in the mutual fund over many years more than makes up for the tax free withdrawal. We started a plan in Virgina 9 years ago because it had the best funds and highest returns at the time. It turns out that after 9 years we only have received a 50% return on that money. Luckily we also started a mutual fund for our daughter to compare, and that pot of money just blows away the 529. plans.”

  2. Morningstar does a lot of great leg work on these funds — which are often NOT easy to understand. But on the point in the prior comment, one of the very most important aspects of these plans is what they let you invest in. Building an effective portfolio is almost impossible in many of them because they offer poor choices or too few of them. MyPlan IQ recently did an analysis of 40 plus 529 plans based on their investment options and found Virginia and Nevada at the top, New Jersey and Mississippi at the bottom. A lot more detail on that analysis at http://www.portfolioist.com. Bottom line: 529s are far from equal.

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