Our Picks

The Best 529 Plans

Karen Wallace

May 29 is National 529 Day, a day that the financial services industry has designated to raise awareness of how 529 college savings plans work and the tax benefits of using them. (Get it, May 29 is 5/29?)

There are lots of benefits to using 529s to save for future college costs. They are funded with aftertax dollars, which then grow tax-free. Withdrawals for qualified education expenses are also tax-free. On top of that, some states offer tax deductions or credits for contributions.

Because of these money-saving tax benefits, 529s are becoming increasingly popular: According to data from the College Savings Plan Network, U.S. families had invested $319.1 billion in 529 accounts as of year-end 2017, a 16% increase over 2016 levels. 

But not all 529 plans are created equal. Some plans are saddled by high fees and poor investment choices, which can hamper your savings progress and erode your returns. Morningstar analysts carefully evaluate 529 plans and assign medalist ratings based on their scores in five key areas: Process, People, Parent, Price, and Performance. 

If your state's plan leaves much to be desired, you have no obligation to invest in it. Investors are free to choose any state's plan. If you are in a state that doesn't offer any tax benefits for 529 contributions, or in a state that offers tax benefits regardless of the state 529 plan used (these are commonly referred to as tax-parity states), you may want to take a look at the 34 plans Morningstar analysts have awarded Gold, Silver, or Bronze medals.  

If you live in a state that does offer tax benefits, though, they should factor into your decision-making. Morningstar researchers have calculated that a 5% state tax benefit is a generous enough incentive to stay in state regardless. (In other words, a tax benefit level of 5% or greater can make up for less-than-compelling investment options and high fees.) 

The four plans profiled below earn Morningstar Analyst Ratings of Gold. Premium members can read in-depth analyses of all 62 plans under coverage in the 529 Plan Center on Morningstar.com.

 Utah's my529 plan
Do-it-yourself investors and advisors will appreciate the flexibility provided by this plan's customizable options. This was the first plan to offer set-it-yourself age-based options, allowing investors to build an asset-allocation path from scratch and select from a broad suite of Vanguard and DFA funds to fill each portfolio. 

This plan features four age-based tracks, and the steps along the tracks became smoother in July 2017. Each track now cuts its equity exposure by 10 to 15 percentage points as the beneficiary reaches college age. The standout oversight provided by Utah has resulted in multiple years of small but steady fee cuts. Most recently, reductions of 1 basis point or less in several portfolios result in age-based portfolios that now charge between 0.17% and 0.21%; that continues to be competitive compared with other predominantly index-based, direct-sold plans, even as peers cut fees.
--Heather Larsen

 Virginia's Invest529 plan
This program offers a well-diversified approach, strong underlying investments, and a competitive price tag. The plan complements the traditional stock and bond funds in its age-based portfolios (recently renamed to reflect beneficiaries' anticipated college date) with specialty asset classes not often found in direct-sold 529 plans. These diversifiers include dedicated exposure to emerging markets (equity and debt), stable value, and global REITs. The plan also follows a sensible approach in blending active funds (from American Funds, Aberdeen, Templeton, etc.) and passive funds (DFA and Vanguard) within the age-based portfolios. 

Virginia continues to lower the plan's cost. After reducing its program management fee in July 2016, the plan has shifted to cheaper share classes in five underlying funds. The age-based portfolios remain attractively priced, particularly given their significant use of actively managed strategies.
--Jeff Holt, CFA

 Nevada's The Vanguard 529 College-Savings Plan
The Vanguard 529 College Savings Plan benefits from a strong underlying lineup of index funds, and its age-based tracks recently became smoother. For index-based plans like this one, costs play a deciding role in their attractiveness. The plan's low-cost advantage has somewhat deteriorated as peers have lowered fees, but the plan's age-based options still charge fees that rank well below average compared with those of direct-sold plans that invest in passive funds. 

In March 2017, Nevada prudently rolled out a smoother path for investors on the plan's three age-based tracks--Aggressive, Moderate, and Conservative. Investors now move through 12 age-based portfolios, up from five. As a result, each track now cuts its equity exposure by 10 percentage points as the beneficiary reaches college age.
--Heather Larsen

 Illinois' BrightStart Direct-Sold College Savings program
Following a complete overhaul in July 2017, Illinois' BrightStart Direct-Sold College Savings program stands out as topnotch. Hands-off investors can invest confidently in either of the plan's two types of age-based portfolios. Both types offer three tracks based on risk tolerance that follow the same asset-allocation paths, but the Multi-Firm portfolio combines active and passive strategies from a variety of firms, while the Index series employs an all-passive approach with Vanguard funds. Investors in the plan's three age-based tracks travel smoother paths than before. Following the addition of four new age-based portfolios, the tracks now take less dramatic, 10-percentage-point steps. Previously, the tracks' stock exposure declined in 20-percentage-point increments.

The revamped plan also comes with lowered fees. The Index series' expense ratios fell roughly 5 basis points and now range between 0.12% and 0.15%, making it one of the least expensive age-based options in the 529 space. The Multi-Firm series' use of active management results in higher expenses, but those fees also came down and are competitively priced between 0.26% and 0.46%. The state also eliminated a $10 annual account fee.
--Jeff Holt, CFA