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.
The Vanguard 529 College Savings Plan
This Nevada-based plan features a suite of Vanguard's renowned, well-diversified index funds at some of the industry's lowest prices. To be sure, the plan requires $3,000 to open an account, which is a deal-killer for most college savers. Utah Educational Savings Plan, a Top-rated peer plan, has similar investments without the high minimum contribution.
Utah Educational Savings Plan
This direct-sold plan also features Vanguard index funds at now-lower prices. The plan's new set-it-once asset-allocation tool allows savers to dictate a mix of investments to change every year as a child nears college. Not every saver needs that extra capability, however, and the plan's other options are solid.
American Funds is behind this Virginia-based plan. It's the nation's largest 529 plan by a long shot, a popular choice among financial advisors who like to mix and match among American's funds in their clients' college savings portfolios. Like the other Top-rated plans, this one is inexpensive and features high-quality investments run by risk-aware, proven investors.
Room for Improvement
Seven plans earned Below Average Analyst Ratings from Morningstar. Two of the plans, Tomorrow's Scholar College Savings Plan and The Upromise College Fund 529 Plan, were on last year's Below Average list as well. Tomorrow's Scholar is hamstrung by some unremarkable investment choices, while the Upromise plan is saddled with high fees.
CollegeBoundfund of Rhode Island moved up to Below Average from Bottom after the plan beefed up its Vanguard indexed offerings for in-state residents. While this plan is a good choice for Rhode Islanders, most of its beneficiaries live outside the state and are invested in program manager AllianceBernstein's investments. That firm's stewardship profile is weak relative to many other 529 competitors.
New to the Below Average list is NextGen College Investing Plan, a Maine-based advisor- and direct-sold plan that features a pricey lineup of investment options. Also, NextGen's program manager, Merrill Lynch Pierce Fenner & Smith, was fined by regulators for not establishing proper supervisory procedures to determine which college savers were suitable for enrollment.
Also hampered by too-high fees given the investment options or tax benefits are TD Ameritrade 529 College Savings Plan, Schwab 529 College Savings Plan, and Minnesota College Savings Plan, all of which received Below Average ratings.