College Savings Plans Get Graded

Karen Wallace: We recently updated our ratings on more than 60 529 plans. That covers nearly every plan available to college savers. I'm here with Madeline Hume. She's an analyst on our Manager Research team covering multi-asset strategies, and she's one of the report's authors.

Madeline, thanks so much for being here.

Madeline Hume: Thanks for having me, Karen.

Wallace: Let's dive in by talking about a high-profile downgrade, the Vanguard 529 plan, and this is run by the State of Nevada. This has been Gold-rated for years. Why isn't this best-in-class any longer?

Hume: The Nevada Vanguard 529 plan has always competed on cost, and its once really robust cost advantage has eroded over the past couple of years. It's no longer the cheapest plan, and it's no longer even in the top five cheapest plans. In fact, it's not even the cheapest plan that features investment management by Vanguard. That honor goes to the New York 529 plan, which is 3 basis points cheaper. Although it's a very thin margin, costs have compressed a lot in the 529 space, and Vanguard has always been pretty competitive on fees.

Wallace: So, let's dive into one of the upgrades now. The California ScholarShare Plan--this went from a Silver to a Gold. What were some of the improvements we saw there?

Hume: Yeah, California is the first state to debut a progressive glide path with investment manager TIAA. They've come to this space before many of the other plans that have featured investment management by TIAA. And this progressive glide path is something that Morningstar considers an industry best practice. In addition, California leverages an open architecture model, which features investments from a wide range of excellent asset managers, including T. Rowe Price, DFA, Pimco, and Metropolitan West, which we think is resulting in a fine option for college savers.

Wallace: Madeline, thanks so much for being here to discuss this.

Hume: Thank you for having me, Karen.

Wallace: You can read the full report on Morningstar.com, which includes all the upgrades and downgrades as well as a description of our ratings methodology.

For Morningstar, I'm Karen Wallace. Thanks for watching.