Adam Zoll: Laura, once people decide that a 529 college-savings plan is the right vehicle for them to save for college, how do they go about assessing whether a plan is a quality plan and one they should be considering?
Laura Lutton: That's a great question because 529 plans can be fairly overwhelming, when you first take a look at what's inside.
I can tell you what the Morningstar analysts look at when we are issuing Analyst Ratings medals plus Neutral and Negative Analyst Ratings to the plans. We are looking to see, what's the quality of the underlying investments? A lot of 529 plans are run by asset management companies that we've all heard of, household names, and you can take a look inside and say, "Do I want to go with indexed options? Do I want something that's actively managed? Do I feel comfortable with who is running the plan? Does the pricing seem reasonable particularly in light of maybe those tax benefits that you might be getting from the state or the convenience of going with a firm where you are comfortable with the investments?"
We also spend a lot of time looking at who is making those decisions about how the money is run because this is going to be an 18- to 20-year investment. So we look at whether the firms and the state oversight are associated with this and whether they are bringing their A game to the stewardship question.
Zoll: Let's say you get into a plan that seems to have everything you are looking for, and then things change. Maybe you see another state's plan that is more appealing to you for some reason. You can always roll your assets into a new state's plan. You may lose some state tax benefits if you had been investing in your own state's 529. But there is some portability as an option?
Lutton: Yes, there is some portability, and you can also make changes within the plan that you choose once per year. There is no reason that you have to be stuck with something if you change your mind or you see some deterioration in some of the investments or other factors that would want you to make change.
Zoll: And one place people can go to find out how Morningstar's analysts rate various 529 plans is the Morningstar 529 Plan Center. You will find our Analyst Ratings and other data on various plans there?
Lutton: Yes, Morningstar is one of the very few organizations that collects data on what's inside the 529 plan from a portfolio standpoint as well as information on performance and fees. We have Morningstar Ratings on the individual options within the plans, so you can take a quick at-a-glance look and see whether risk-adjusted performance where you would expect it to be and if you are comfortable with that.
We also have some nice graphics in there that show you within the age-based options whether the asset allocation is relatively equity-heavy or not so much [equity-heavy] relative to what else is out there in the industry.
Zoll: Great. Thanks for sharing your insights