: How did you pick which 529 plans to rate?
: Morningstar's mutual fund analysts rated 53 of the nation's 82 529 college-savings plans. We wanted to be sure to cover the nation's largest plans, like New York's 529 Program (Direct)
and CollegeAmerica of Virginia
, but from there, we didn't merely sort the plans by assets under management and draw the line at 53. We picked some plans run by program managers we know well, like several plans each from Vanguard and TIAA-CREF, as well as a few smaller plans that we thought were innovative, including Arkansas' iShares 529 Plan.
: Why did Morningstar give higher ratings to some advisor-sold plans when a direct-sold plan from the same state was cheaper?
: Cost was a big factor in our ratings, and direct-sold plans are on average much cheaper than advisor-sold plans. But when Morningstar's analysts were issuing their ratings on 529 plans, they primarily compared advisor-sold plans with one another and then made a similar comparison among direct-sold plans. That's because those plans typically are aimed at different investors--those working with an advisor and those investing on their own.
Let's take Virginia's plans as an example. The state's advisor-sold CollegeAmerica plan got a Top Morningstar Analyst rating and the direct-sold Virginia Education Savings Trust
received an Above Average Morningstar Analyst rating. One shouldn't assume that CollegeAmerica is the better choice for Virginians, but CollegeAmerica is Morningstar's top pick among advisor-sold plans. For college savers enrolling directly in a 529 plan without the help of an advisor, Virginia Education Savings Trust is a very strong choice.
: CollegeAdvantage 529 Savings Plan of Ohio
received a Top Morningstar Analyst Rating, but there are other direct-sold options in other states that are less expensive. Why did CollegeAdvantage do so well?
: Among direct-sold 529 plans, Morningstar compared plans that include actively managed options and those that include primarily indexed options. Morningstar found that it's significantly more expensive to invest in actively managed investment options rather than passive indexed options. (This also is true among mutual funds.) In addition, plans that mix managers from various firms--a plan design that's known in the investment industry as "open-architecture"--tend to charge more than those that use the program manager's in-house managers. CollegeAdvantage, however, includes active and passive investment options run by managers from a variety of firms, and it has done so at a reasonable price.
Among the direct-sold indexed-only plans, The Vanguard 529 Plan of Nevada
earned the Morningstar Analyst Rating of Top, but others on the Above Average list certainly deserve honorable mention, particularly for investors that are unable to meet The Vanguard 529's $3,000 minimum investment. Other plans featuring inexpensive Vanguard indexed options that received an Above Average Morningstar Analyst Rating include Utah Education Savings Plan
, Illinois' Bright Start College Savings (Direct)
, and New York's 529 Program (Direct). Michigan Education Savings Program
, which has indexed options from TIAA-CREF, also got an Above Average Morningstar Analyst Rating.