Study on 529 plan disclosure shows most plans fall short.
When making a big decision--buying a car, sending a child to school, seeking medical treatment--we all require some basic information in order to make a sound choice. Would you buy a car without knowing the make and price? Would you send your child to school without knowing her teacher's name? Would you receive medical treatment without knowing what it was for?
College savers need the same kinds of details when picking a 529 plan, yet often the information either isn't provided or takes too much digging to find. A new Morningstar study of 529 plans' disclosure found that the typical 529 plan website and plan document provide only high-level descriptions of the investment options. Basic information--including the name and tenure of the portfolio managers running the 529 investment options, and details about the most recent portfolios--isn't required disclosure for 529 plans, even though 529 plans collectively invest more than $162 billion of college savers' capital.
Morningstar privately collects data from 529 plans each month, including detailed information on the plans' investment options, performance, and fees, but such reporting is largely voluntary. Sometimes plans fail to routinely provide monthly returns or total assets under management. That's why Morningstar publicly advocated for better disclosure last year in a letter to the Municipal Securities Rulemaking Board (MSRB) and continues to believe good transparency is necessary for college savers to accurately compare and monitor 529 plan investments.
As part of our annual research into 529 plans, Morningstar's fund analysts compiled a list of information we'd like to see each plan disclose so that we can properly evaluate their investments and determine which are most likely to help college savers reach their goals. We looked through each plan's website and its program document (the 529 plan's version of a prospectus) to see what data was available.
What Investors Need to Know: Static Options
Specifically, for the plans' static options, we want to know how much the option costs, who manages the portfolio and for how long have they been at it, what the investment strategy is, what the portfolio owns, and what the performance record is. Some static options have multiple underlying investments, so we look at information on the option as a whole as well as for each underlying component.
The attached checklists (Table 1a and Table 1b) compiled in July and August, show which plans disclose these important pieces of information for static options. Not one 529 plan meets all the criteria.
To be sure, some plan websites come close. Wisconsin's EdVest College Savings Plan serves as a good example of how to link information about underlying investments to the static options. More commonly, though, plans merely tell the investor which mutual fund a static option owns but offer no more information. Louisiana Start Saving for College, for instance, provides step-by-step instructions on how to look up the underlying funds not on its own website, but Vanguard's.
In Table 1b, the six notably sparse columns refer to portfolio and manager data that Morningstar fund analysts regularly use to evaluate a fund's risk exposures and to monitor the stability of the management team. For stock fund portfolios, we use market-cap and sector weightings to establish whether an investment is primarily exposed to big or small companies, or firms in a specific sector of the economy, like health care, technology, or energy. This information helps us anticipate how an investment will perform and identify potential risks.