How to use Morningstar's new data to find the most appropriate options for clients.
This article first appeared in the June/July 2011 issue of Morningstar Advisor magazine. Get your free subscription here.
Analyzing 529 plans and their investment options for clients can be daunting, but new data and tools available in Morningstar Office make the task approachable. Advisors now have all the plan-level data necessary to determine whether an option is suitable for a client, and they can screen for plan investment options in similar ways that they shop for mutual funds.
Look Home, First
It's important first to take a look at the client's home-state plans to understand the potential tax breaks or other perks (such as Maine's $500 grant for newborns signed up before their first birthday).
Using data in Morningstar Office, advisors can check whether the client's home state offers tax deductions on contributions and whether those deductions are portable to plans outside of the home state (Exhibit 1).
A plan from any state nationwide may be appropriate depending on the tax benefits and the client's circumstances.
Then Head for the Top
Whether a client is staying in-state or looking nationally, advisors will want to start zeroing in on the highest-quality plans. Morningstar now provides analyst ratings on 54 of the largest 529 plans, representing more than 90% of the industry's assets. Morningstar's analysts have acquired an in-depth understanding of the investment lineups through bottom-up research on the individual funds that make up the 529 portfolios. Analysts also know many program managers well as a result of their work on Morningstar's Stewardship Grades for mutual funds. The 529 analyst ratings, therefore, are a holistic measure of a plan's potential for success. Analysts base their assessment on five areas: Program Manager, People (fund managers), Process/Portfolio, Performance, and Price. Analysts award plans a rating of "Top," "Above Average," "Average," "Below Average," or "Bottom."
The analysts' work is presented in the 529 plan reports, which are available in Morningstar Office and Principia (Exhibit 2). The plan reports are a great way to get a bird's-eye view of each plan. For age-based tracks (those all-in-one investments that automatically reduce exposure to equities over time), the reports also depict the plan's target equity allocation, or glide path, in an easy-to-understand graphic.
To see the potential of Morningstar's new data, let's use the example of a client who is a New Jersey resident. A simple screen in Morningstar Office can find Top and Above-Average plans sponsored by New Jersey and by other states that are open to nonresidents (Exhibit 3).