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By Adam Zoll and Laura Pavlenko Lutton | 10-12-2012 02:00 PM

Breaking Down This Year's 529 Plan Ratings

Morningstar's Laura Lutton details the new ratings system used for 529 college-savings plans, what analysts look for in the plans, and improvements in the 529 industry.

Adam Zoll: I'm Adam Zoll for Morningstar. 529 plans have become many investors' college-savings vehicle of choice, and this week Morningstar released its updates to its annual ratings of state-sponsored 529 plans. Here to talk about this year's changes is Laura Lutton. Laura is the head of Morningstar's 529 plan research team. Laura, thanks for being here.

Laura Lutton: Great to be here. Thanks.

Zoll: So Laura, what's new for this year's 529 plan ratings?

Lutton: Well, this year we have a new rating scale. It's consistent with the rating scale that we introduced for mutual funds about a year ago. These are the Morningstar [Analyst Ratings] for funds that we recommend. They get Gold, Silver or Bronze. And then investments that we think are going to [have a similar performance to that of the overall market], we give a Neutral rating. And then we also have a negative rating for investments that we don't think are as well-suited or are going to be successful over the long term. So, we've applied the same scale to 529 plans. We used to assign ratings of top, above-average, average, below-average, and bottom, and we've replaced that scale with those three medals plus Neutral and Negative.

Zoll: And the medal rating applies to the entire plan as a whole, as opposed to specific tracks within the plan, is that correct?

Lutton: That's correct. So, we look across all of the investment options within the 529 plan. There are usually a lot of choices, such as age-based options, where the asset allocation shifts over time, or individual-investment options that you can chose, as well. So, we look at the whole gamut, and we decide whether we think these investments are likely to be successful over the long term or not. We layer in things like whether there is a tax benefit locally. We spend a lot of time on fees to see if these plans are a good deal. And that's how we arrive at that rating.

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