Six plans move to the head of the class in 2011.
Students of the 529 college-savings plan industry take note: These plans continue to get better marks for lower fees and higher-quality investments.
Morningstar's eighth annual study of 529 plans found that several plans have trimmed their expense ratios in recent months, with the industry's average asset-weighted expense ratio dropping to 0.87% from 0.94% over a 10-month period through August 2011. That decline represents significant price cut in plans from states such as Georgia, Nebraska, and Oklahoma.
Several 529 plans also worked to improve their menu of investment options. California awarded its direct-sold ScholarShare College Savings Plan program management contract to TIAA Tuition Financing (an arm of TIAA-CREF) so college savers would have access to a strong set of investments run by a variety of firms' managers at a reasonable price. Nearby in Utah, the direct-sold Utah Educational Savings Plan introduced the first do-it-yourself age-based track where college savers can set a mix of investments to change annually. This feature, which will likely appeal to fee-based financial planners as well as more-sophisticated self-directed investors, comes amid a broader fee cut for the plan's Vanguard indexed options. And in Rhode Island, CollegeBoundfund tacked on additional Vanguard indexed options for its in-state residents, diversifying an AllianceBernstein-run plan.
529 plans' performance had been keeping pace with similar open-end mutual funds, but in 2011's volatile third quarter, the 529 investments fell slightly behind over the five-year period through Sept. 30, 2011. That's disappointing for 529 savers, but at least some of that underperformance is likely offset by the tax benefits associated with 529 plans.
As the industry has improved, none of the 529 plans that Morningstar reviewed warranted an Analyst Rating of Bottom, leaving 58 plans rated Top, Above Average, Average, and Below Average. To determine a plan's Analyst Rating, Morningstar's analysts comprehensively evaluate a plan's portfolio of investment options; the investment options' performance; the skill of the options' managers; the stewardship practices of the plan's administration; and the costs associated with the investment options.
Six 529 plans represented the industry's highest standards, earning Top Analyst Ratings from Morningstar. Five of the six plans were also rated Top in 2010, with Utah Educational Savings Plan the only newcomer. Here's what made those Top plans stand out:
T. Rowe Price College Savings Plan and Maryland College Investment Plan
These T. Rowe-run plans are built upon a chassis of well-executed funds. The age-based options' asset allocation is more equity-heavy than the norm and the expense ratios are higher than other direct-sold plans', most of which contain indexed funds. But college savers are getting an excellent set of actively managed funds run by a very strong, tested team.
CollegeAdvantage 529 Savings Plan
There's something for everyone in this direct-sold plan from the Ohio Tuition Trust Authority. The plan mixes managers from various firms including Vanguard, PIMCO, Oppenheimer, and GE. That variety is becoming more common among 529 plans, but what's notable here are the plan's low fees.