Meet the Parents

College savers use 529 plans to make long-term investments with a critical goal. Given the high financial and emotional stakes involved in choosing and paying for the right college, college savers should feel confident about the organizations overseeing their 529 investments. While a mutual fund's parent is the asset-management company offering the fund, a 529 plan's parent role is split between the plan's program manager and its offering state. Frequently the program manager has heavy input on the plan's investment options and pricing, while the state hires the program manager and signs off on all investment decisions. Some states have a dedicated board that has fiduciary responsibilities over a plan, similar to a mutual fund's board of directors.

The plans vary in the way they split responsibilities between the program manager and the state. In some cases, the program manager takes a leadership role in investment decisions, while in other cases the state takes the reins and only utilizes the program manager for record-keeping and marketing. 

Regardless of how duties are divided, Morningstar assigns positive Parent ratings to organizations that consistently put college savers before business or political interests. To arrive at a plan's Parent rating (one of the five components that make up the Morningstar Analyst Rating for 529 plans), Morningstar qualitatively evaluates the stewardship practices of the program manager, as well as the due-diligence process of the state governing the 529 plan. There's no formula that drives the final Parent rating. The program manager and state involvement vary from plan to plan, and the Parent rating is a qualitative assessment that considers this.

While the program manager may have more day-to-day involvement with 529 investments, states have a major influence on whether program managers have a presence in the industry at all. Many states have voted with their feet, especially after 2008, by hiring new program managers when old contracts ended. For instance, Ohio cast off Putnam and retained BlackRock (BLK) in 2010 as the program manager for its advisor-sold plan. More recently, New York replaced Columbia with  JPMorgan (JPM) to run its advisor-sold plan. These contract changes have led to significant shifts in market share by program manager, with some relative newcomers to the 529 realm, like JPMorgan, getting immediate scale. 

TIAA-CREF, which was hired in 2011 to replace Fidelity as the program manager running California's 529 plan, has edged in front of Fidelity for the second-largest slice of market share for direct-sold 529 assets. TIAA-CREF remains a distant second in market share to Upromise, which continues to dominate the direct-sold 529 industry.  

In the advisor-sold side of the industry, American Funds continues to drastically outweigh every other program manager. The firm's Virginia CollegeAmerica plan holds $37 billion in assets, more than 5 times the assets in Rhode Island CollegeBoundFund, which is run by  AllianceBernstein (AB).

In addition to prompting changes in program-manager market share, new 529 contracts often have an impact on plans' individual investment options. Frequently, the new program manager overhauls the plan's investment options and introduces all new choices for participants. This table shows the average age of the investment options in each 529 plan. The plans with investment options of a younger vintage often have newer program managers. Plans that were recently overhauled include Wisconsin's Tomorrow's Scholar and Edvest, New York's Advisor-Guided 529 Program, and California's ScholarShare College Savings Plan. The TNStars College Savings 529 Program is brand new, launched in Tennessee in 2012.

Churn in a plan's investment options is not necessarily bad for investors. For instance, if a 529 plan replaces underlying investments run by middling or poor stewards with investment managers that have solid stewardship reputations, college savers are probably better off. This table shows the asset managers associated with each 529 plan, as well as the percentage of plan assets run by each asset manager. (Some values are marked NA, usually because the underlying investment is a separate account with no associated firm in Morningstar's database.) The data is particularly revealing for open-architecture plans, which include a variety of asset managers: College savers can see what portion of plan assets are run by third-party asset managers and assess their stewardship practices. Morningstar's Analyst Rating for Funds and component Parent ratings are a good starting point for learning more about a particular firm's stewardship strengths and weaknesses.