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529 Plans Struggle With Costs

The price isn't yet right.

John Rekenthaler, 11/21/2013

Raising Questions
Ron Estes isn't happy with Morningstar.

Ron Estes being the Kansas State Treasurer, and in charge of the state's 529 program. Kansas offers three 529 plans, and one of them received a Negative Morningstar Analyst Rating. In response, Estes has posted a letter on Kansas' website, contending that Morningstar's approach to rating 529 plans contains "blatant inconsistencies" that "misguide the investing public, damage the reputation of 529 higher education savings plans, and discredit their [sic] own reputation."

Not for me to say. I'll discuss Morningstar decisions that I helped to make, but I have not been involved with the company's 529 research. 

I was, however, struck by one line of Estes' argument, in which he writes that "Morningstar's misguided bias toward 'low fees' also fails to account for the benefits investors obtain when working through an actively-managed 529 account."

Wait. What? A misguided bias toward low fees? (And why does the term low fees need quotation marks?)

What's more, a trade-industry story in Ignites (the story is paywalled) about the Kansas letter quotes a 529 consultant stating that Morningstar's preference for low-cost funds "perpetuates a 'race to the bottom' in fees." 

Encouraging a race to the bottom in fees is bad for 529 investors? 

Those quotes got me thinking. If a State Treasurer and industry consultant are seemingly so cavalier about expenses, what does that imply about 529 funds' costs?

is vice president of research for Morningstar.

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