Most plans are improving, but some still have work to do.
529 college-savings plans are growing up quickly, but like a lot of teenagers, they have some awkward qualities.
These state-based savings plans have made significant strides forward over the past 18 months. Thirty of the nation's 82 529 plans have cut their fees, which is an immediate benefit to shareholders. Also, states have been relatively quick to get rid of unsuccessful investment options within 529 plans. These signs of maturity, however, are offset by a few less-desirable features. Fees at many plans could be lower, for example, and many investment choices fail the best-in-class test.
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 $119 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.
From this work, Morningstar developed a new Analyst Rating for 529 plans, and it has been assigned to each of the 52 plans the analysts studied most closely. The Analyst Ratings are Top, Above Average, Average, Below Average, and Bottom. Investors can use these ratings to quickly identify which plans are the industry's best and worst, as well as where plans fall in between.
To earn a Top rating, plans must harness the industry's best practices. Specifically, Top plans have strong investment options run by talented management teams. Those managers typically work for asset-management companies that are good stewards of capital. Top 529 plans charge fair fees for their investment strategies and, in Morningstar's view, are likely to deliver strong long-term performances.
Five 529 plans received Top Morningstar Analyst Ratings and thus make Morningstar's Best 529 Plan list for 2010. These plans are the hands-down best choices for local residents, but they're also contenders for those willing to leave home for a best-of-breed plan. Among the college savers most likely to benefit from an out-of-state plan are those living in states with no tax incentives to stay put and those who intend to save tens of thousands of dollars in a 529 plan. (In-state tax benefits shrink in importance as one's nest egg grows larger.)
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.