The Best and Worst 529 College-Savings Plans
Our annual review of the 529 college-savings industry.
Good news: 529 college-savings plans continue to get better. Several years ago, many were high-cost messes. Since then, some have been spruced up and others have been shut down. The important thing is that more people using these vehicles to save for college are getting a good deal.
Closing Down and Cleaning Up
In 2007, West Virginia folded two exorbitantly expensive plans into a cheaper Hartford plan and Pennsylvania merged its advisor-sold plan into its direct-sold offering. Most recently, Tennessee's BEST Savings Plan, which offered college savers limited options, announced plans to close its doors on May 30, 2008.
We've been particularly pleased to see some regulars on our worst-plans list clean up their acts. It still isn't perfect, but North Dakota's College SAVE Plan, a worst constituent in 2006, changed for the better when it dropped its growth-leaning Morgan Stanley lineup for an assortment of stellar Vanguard index funds. As a result, it is a bit better diversified now. And although it still has a few pricier funds in the mix, one of 2007's worst, Missouri's MOST 529 Advisor Plan, made its way off the list by adding better funds and cutting its formerly excessive expenses to a more reasonable level.
Even some of the industry's better plans continue to improve. Michigan Education Savings Program, managed by TIAA-CREF, lowered its fees in 2007. It now offers its assortment of well-diversified age-based and static portfolios to residents and nonresidents alike for just 45 basis points. ("Age-based" 529 options grow more conservative as the student nears college age, whereas "static" options use a fixed mix of mutual funds.) Likewise, the program-management fee at the respectable Kansas plans fell significantly in 2007.
So, how do we build our best and worst lists? As in the past, we've focused on diversification, fees, flexibility, and the underlying funds when deciding which 529 plans to highlight. We like to see plans that aren't heavily reliant on any one area of the market, because that can mean a more volatile ride and lower returns than what investors face at better-diversified 529 programs. Costs are key because they come directly out of investors' returns, meaning the higher the price tag, the lower the returns. (If you are new to Morningstar.com, you may be surprised to learn that costs are the best predictors of mutual funds' long-term performance; because 529 plans are composed of mutual funds, low costs are equally essential for their success.) And because so many plans rely on similarly constructed index funds, it's safe to say the lowest-priced ones will likely earn the best returns. Meanwhile, flexibility matters because, when it comes to asset allocation, there's generally no one-size-fits-all solution. Investors are approaching college with different amounts of principal, different risk tolerances, and different time horizons, so we typically look favorably on plans that allow them to make adjustments to their exposure, be it through individual funds or static portfolios with a fixed mix of mutual funds. As far as the underlying funds go, we look for seasoned managers, shareholder friendliness, and sensible strategies. We've found that these qualities put investors in a good position to earn strong long-term returns.
As always, we remind investors not to ignore home-state plans, given the tax deductions and tax-free earnings growth often available to in-state residents. Still, the tax breaks don't necessarily validate an otherwise poorly designed plan, so it pays to look around.
A word to those who have used our best and worst lists in the past. We continue to stand behind the picks of earlier years, but this year's list is a snapshot of where the industry stands today. If you've made a selection from a previous best list, you're still in great hands.
Without further ado, here is this year's list of the best and worst 529 college-savings plans, which has changed significantly from last year.
The Best 529 College-Savings Plans
|Best 529 College Savings Plans|
|Illinois Bright Start College Savings Program||OppenheimerFunds Inc.|
|Maryland College Inv Plan||T. Rowe Price|
|Virginia CollegeAmerica*||Virginia (American Funds)|
|Virginia Education Savings Trust||Virginia|
|Colorado Scholars Choice College Savings Program*||Legg Mason, Inc.|
|* Broker Sold|
Illinois Bright Start College Savings Program
Illinois is a Cinderella story. Previously lackluster with middling investment options, the plan switched its program manager to OppenheimerFunds Inc. It now offers a choice between sensibly constructed all-index and actively managed age-based options with underlying funds from Vanguard and Oppenheimer, respectively, as well as rock-bottom expenses. The plan's index option makes it a close substitute for the laudable Utah Educational Savings Plan, a former member of the best list (and still an excellent plan). The tie-breaker came down to fees: The Illinois plan's index option has annual asset-based fees that are slightly below what the Utah plan offers. (Annual asset-based fees include the underlying fund expenses and the program and state charges. They don't typically include annual maintenance fees or sales charges for those going the broker route.)
Maryland College Investment Plan
Managed by T. Rowe Price, this direct-sold option remains a favorite for investors in search of solid actively managed funds. The age-based portfolio includes top-tier funds, including the well-diversified T. Rowe Price Spectrum Income (RPSIX), a Fund Analyst Pick in the multisector-bond category. The plan has a sensible split between value and growth strategies and also includes plenty of mid- and small-cap exposure. Investors can customize their plans with the help of five static portfolios. Low fees round out the appeal here: The plan's portfolios range from 68 basis points to 97 basis points in annual asset-based fees.
Virginia Education Savings Trust and VirginiaCollegeAmerica 529 Savings Plan (broker-sold)
We also consider the direct-sold Virginia Education Savings Trust and Virginia's advisor-sold CollegeAmerica best in class. The Education Savings Trust offers an appealing collection of stellar active managers and proven index offerings in its age-based option, including Vanguard, Templeton, and Capital Research and Management (aka, the American Funds). It also boasts a collection of single-fund choices that investors can pull together for ample diversification, such as a REIT index, an inflation-protected securities fund, and an international fund. Investors don't pay a big price tag for that flexibility and diversification, either: Total annual asset-based fees clock in between 31 basis points and 57 basis points. Meanwhile, CollegeAmerica remains a favorite for its broad assortment of excellent American Fund mutual funds spanning many asset classes and strategies. This broker-sold option also is low-priced, costing investors anywhere between 65 basis points and 1.10% in annual asset-based fees for A shares. (Remember, sales charges are layered on top of these fees.)
Colorado Scholars Choice College Savings Program (broker-sold)
Colorado's Scholars Choice College Savings Program remains our other favorite for investors going the advisor route. We like the sensible split between growth and value strategies. Investors have a few static portfolios at their disposal as well, which allows for some customization. The primary draws, however, are reasonable expenses and a star-studded lineup of managers, including Bill Miller, small-cap maven Chuck Royce of Royce Funds, and impressive bond squads from Western Asset Management. Miller's Legg Mason Value (LMVTX) has taken it on the chin in recent years, causing some to question Miller's expertise. We think Miller has a good shot at rebounding, however. Moreover, while that fund plays a large role early on in the age-based portfolios, it doesn't have much impact later on, so those approaching college haven't had to swallow much of its recent losses.
Similar to the Utah Educational Savings Plan, the College Savings Plan of Nebraska, a member of the best list last year, is still great choice for the college savers going the direct route. Cheaper plans nudged it off the list this year, but investors can still find excellent funds, ample diversification, and plenty of flexibility for a reasonable price here.
The Worst 529 College-Savings Plans
|Worst 529 College Savings Plans|
|Ohio Putnam CollegeAdvantage*||Putnam Investment Management|
|Mississippi Affordable College Savings Program||TIAA-CREF|
|Mississippi Affordable College Savings Program*||TIAA-CREF|
|New York 529 College Savings Program||Upromise|
|Nebraska AIM College Savings Plan*||Union Bank (AIM)|
|* Broker Sold|
Ohio Putnam CollegeAdvantage (broker-sold)
We are increasingly concerned about Ohio's advisor-sold Putnam CollegeAdvantage. The funds have had bad performance, and we've seen troublingly high turnover among managers, analysts, and executives at Putnam. Putnam fired the comanagers at the helm of the plan's large-growth fund Putnam Voyager (PVOYX) at the start of 2008, for example, leaving the fund in the hands of an interim manager until it can find a replacement. The best asset managers have strong cultures that keep key people in place, but unhealthy ones have revolving doors at the managers' offices. Until things stabilize at Putnam (which might not be for quite some time), investors should steer clear of this plan.
Mississippi Affordable College Savings Program and Mississippi Affordable College Savings Advisor Program (broker-sold)
We take issue with the direct-sold and the advisor-sold Mississippi 529 programs. The program manager, TIAA-CREF, levies a hefty 70-basis-point program-management fee on both plans, which rely heavily on index funds. Not only does that erode much of the advantage of low-cost index funds, it's also hard to determine what TIAA-CREF is doing to earn such high fees. The direct-sold plan offers limited options, with only an age-based portfolio, an all-equity portfolio, and a guaranteed option available to investors. The advisor-sold plan also lacks flexibility and it doesn't include TIAA-CREF's usual targeted exposure to real estate or inflation-protected bonds. The state offers handsome tax deductions on plan contributions, but given these lackluster options, we think Mississippi residents should seriously consider their alternatives.
New York 529 College Savings Program
We're bothered by New York's 529 College Savings Program's lack of diversification. The direct-sold plan is moderately priced and relies on solid Vanguard index funds, but it doesn't provide investors with any international exposure. Not only does that mean that the plan is missing the gains made in foreign markets, it also has no buffer when the U.S. market turns down.
Nebraska AIM College Savings Plan (broker-sold)
Nebraska's AIM College Savings Plan is the only holdover from last year's worst list. The broker-sold plan made some changes to its lineup in 2007, but it still charges as much as 1.61% in annual asset-based fees for generally growth-tilted portfolios. College savers can find better diversification at a lower price at the state's two direct-sold options.
Some plans just barely escaped our worst list. While Iowa Advisor 529 Plan relies on decent American Century funds, its layers of fees and poor diversification on the fixed-income side undercut its appeal. Kentucky Education Savings Plan Trust looks lackluster on flexibility. Investors are forced to choose among an age-based plan, an all-equity portfolio, and an ultraconservative guaranteed option, leaving them few tools with which to customize. Finally, although Alabama Higher Education 529 Fund, a worst constituent in 2007, offers an improved equity lineup and more competitive expenses, the state continues to tax the earnings on out-of-state plans, which serves to strong-arm investors into the home-state plan. We'd like to see the state adopt the tax standards that have become the industry norm.
So go the industry's best and worst this year. But what about the plans that don't fall on this list? To check out your state plan, click here. You'll find all available plans, with links to our analysis and plan data. To investigate other issues around 529s and college saving more generally, peruse our articles found here. We discuss alternatives to 529s, investing out-of-state, and a host of other issues.
Marta Norton does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.