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By Adam Zoll and Kathryn Spica, CFA | 10-16-2014 04:00 PM

5 Upgrades, 10 Downgrades in Our 529 Ratings

Even though we've downgraded more plans this year, better oversight and lower fees have helped improve the overall picture for the industry.

Note: This video is part of Morningstar's October 2014 College Planning Report Card special report.

Adam Zoll: For Morningstar, I'm Adam Zoll. Morningstar has released its updated ratings for 529 college-savings plans, and here to tell us what's new is Kathryn Spica, she is the senior fund analyst of 529 plans for Morningstar.

Kathryn, thanks for being with us.

Kathryn Spica: Thanks for having me.

Zoll: Kathryn, let's get right to it. What are some of the changes with this year's 529 plan ratings?

Spica: We've rated 64 plans this year, we had five upgrades and ten downgrades. And even though we've downgraded more plans this year, we still see the industry improving. There are a lot of positive trends. Program managers are improving their oversight. They are adding more impressive investments to the lineup. They are lowering fees. There are a lot of trends that are really benefiting college savers.

Zoll: Let's talk about the plans that were upgraded. Can you give us some examples of what the plans were and why they received upgrades?

Spica: For a couple of plans, we actually upgraded the parent rating. In the parent rating, we look at the program manager--typically an investment manager but sometimes a state-sponsored entity, for example--and we also look at the state. So, every 529 plan is sponsored by a state. They have to be run through a specific state. And we've seen a lot of good trends in oversight.

Virginia, for example: They have two plans and their direct-sold plan, Virginia InVest, got an upgrade this year. It went from a Bronze rating to a Silver rating. We've been really impressed with the team at Virginia. They keep an eye on fees. They have lowered their program-management fee this year. Their plan is competitively priced. They have a really great investment lineup, and they have really good oversight from the state.

Zoll: Great. Then, you mentioned the downgrades. What were some reasons that plans were downgraded this year?

Spica: We've seen a couple of plans introduce some newer themes to their portfolios, for example. As one example, Fidelity introduced tactical management. And so, while they have some experience on the institutional side, they don't have a public track record. So, what they are bringing to the table in these plans is relatively new and it's untested. We haven't actually seen how they can do. So, while they have made a lot of strides in the past--improving the quality of the active managers that are included in the lineup, producing competitive prices, for example--this new component just lowers our conviction a little bit. We just want to see how they play out in practice.

Zoll: So, when you say tactical management, you're talking about funds that move into and out of market positions based on the prevailing conditions?

Spica: Exactly. So, they have asset-allocation funds within their portfolios. Most 529s have age-based tracks where they vary the asset-allocation mix over time, and [Fidelity is] adding tactical components to that. They have also added that to their target-date series, which has a similar track, and it's just a new component and we want to see how they do.

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