Video Reports

Embed this video

Copy Code

Link to this video

Get LinkEmbedLicenseRecommend (-)Print
Bookmark and Share

By Adam Zoll and Laura Pavlenko Lutton | 10-17-2013 12:00 PM

More Medalists Shine in Our Annual 529 Plan Ratings

Improvements across the 529 spectrum helped increased the medal count in our annual plan ratings, says Morningstar's Laura Lutton.

Adam Zoll: I am Adam Zoll. Morningstar has just released its annual ratings for 529 college-savings plans. Here to talk about what's new and what has not changed is Laura Lutton who heads up Morningstar's 529 research team.

Laura, thanks for being here.

Laura Lutton: Thanks for having me.

Zoll: Let's first talk about what is new? Which states or which plans have improved their ratings in our methodology?

Lutton: At the top of our list, the plans that we have rated Gold and Silver, you're going to see a lot of familiar names. These are plans that we've liked for years and years. We have a total of nine that get either a Gold or a Silver medal. We've had one plan make the jump up to Silver, and that's a plan out of California, the ScholarShare program. And that's an example of a plan that we think did a really nice job, improving the underlying investments as well as cutting fees, which is a broad trend that we've seen across 529s and meaningfully affected the rating for the California plan this year.

Zoll: Let's talk a bit more about that, the landscape of 529 college-savings plans nationwide. This year, quite a few medalists are among the crop.

Lutton: Yes. About half the plans that we rated--we rated 64 this year--half of them got medals, meaning we think they've got the stuff that you need to outperform. And because we've seen such meaningful improvements across the industry, it's not a surprise that we then see more medals.

Some examples of that would be we've got four Fidelity direct-sold plans that we upgraded from Neutral to Bronze this year. They are out of Arizona, Delaware, New Hampshire, and Massachusetts. They made some pretty substantial cuts to the fees on their indexed age-based options. We think those are compelling, and the plans have improved.

We had two more plans upgraded to Bronze. Those are the NEST plans out of Nebraska, which have similar story with a nice improvement to the underlying holdings. And then in the state of Nebraska, we actually saw some changes to the state tax benefits that make those plans more attractive.

Zoll: Aside from investment costs, what are some of the qualities that our analysts look for in rating a plan?

Lutton: We really look very comprehensively at the plan, which is, a big effort on behalf of the team, we look at the quality of the underlying investments and what the costs are. We look at who's running the assets, and I think what's really significant about the 529 industry relative to the broader mutual fund industries, we see a lot of best-in-class managers and funds included in these plans. The quality, over the 10 years that we've been setting them, has really improved dramatically.

So, we're looking at that. We are also looking at the stewardship characteristics of both the state and the asset manager who's in charge of running the investments inside the plan. Cost is a big driver, particularly among direct-sold plans where we see a lot of indexed options. And really we're at the point where every basis point counts.

Zoll: Great. It sounds like there is lot of quality options out there for people who are interest in using a 529 to save for college.

Lutton: Yeah. It's a lot of good stuff out there.

Zoll: Great. Well, Laura, thanks for being with us today.

Lutton: Thanks for having me.

Zoll: For Morningstar, I'm Adam Zoll. Thanks for watching.

{1}
{1}
{2}
{0}-{1} of {2} Comments
{0}-{1} of {2} Comment
{1}
{5}
  • This post has been reported.
  • Comment removed for violation of Terms of Use ({0})
    Please create a username to comment on this article
    Username: