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The 3 Best 529 Plans

The 3 Best 529 Plans

Susan Dziubinski: Hi, I'm Susan Dziubinski with Morningstar. Morningstar recently updated its ratings on the largest 529 education savings plans. Joining me today to discuss this year's top-rated plans is Adam Millson. Adam is an analyst with Morningstar's global multi-asset funds research team.

Thanks for joining me today, Adam.

Adam Millson: Thanks for having me, Susan.

Dziubinski: Morningstar updates its 529 ratings every October. What are some of the best practices or qualities of the highest-rated plans?

Millson: We do update them annually, and we focus on four key pillars, so that's People, Process, Price, and Parent. And those four key pillars inform our holistic view of the plan, which is the Morningstar Analyst Rating. We have those from Gold, Silver, Bronze, Neutral, to Negative. And for the Gold-rated plans we really look for strong characteristics across those four key pillars. So, they usually have a strong investment team, robust resources, usually have a well-researched and constructed plan overall and glide paths supporting those. They also have an attractive fee compared to peers across the industry, and they have strong oversight from the state as well as from the investment manager.

Dziubinski: This year there were three plans that came out with our highest rating, the Gold rating, and we're going to talk a little bit about those plans in particular. The first is Utah's my529 plan, and this is the only plan that has achieved a Gold rating ever since we started giving out ratings in 2012, I believe, for 529 plans. Tell us what's so enduring about this particular plan.

Millson: The my529 investment team is very robust, a deep team overseeing this plan. And although it's had a strong rating for many years like you noted, they haven't really rested at all. They're continually improving the plan, and we saw that again this year. This year they collapsed their four age-based options, which focused on a stepped glide path, to one singular progressive glide path. And a progressive glide path more gradually derisks over time, which we view as one approach to this best practice. So, they're continually improving the plan for investors. When you look under the hood of the portfolios as well, they're using low-cost index funds. So, they have strong constructions but come at a very attractive price. Overall, participants or education savers here are getting a very well-thought-out and researched product, but at the same time at a very attractive price. So, it should prove well over the long term.

Dziubinski: And another Gold-rated plan is Illinois' plan. We are in Illinois right now. The Bright Start Direct-Sold College Savings plan earns our top rating. Tell us a little bit about that one.

Millson: You get really a nice mix of offerings here. They do offer a glide path that is stepped. So, like we talked about, not a progressive glide path, but it does use 10% equity steps, which we think is sufficiently gradual to reduce timing risks, which is the biggest concern over the glide path, that abrupt derisking during critical periods. So, not only you're getting that well thought out glide path, but at the same time, you're getting different options. They offer a multifirm option and an index option. The multi-firm option uses low-cost core index funds and then uses strong actively managed strategies around that. It's a solid construction there. But on the index side, you're really just getting mainly index funds. And then, within those options, you actually get three different tracks. So, investors with different risk tolerances, you're getting an aggressive track, you're getting a moderate, and you're getting a conservative. You get a lot of variety that really kind of meets your own risk tolerance as the education saver. And lastly, with that low-cost index fund it is one of the cheaper across compared to peers. It is attractively priced. And then, the state itself provides very strong oversight, which has helped lower fees over time but also continually improved the plan for investors. You're getting a strong product here as well.

Dziubinski: And then, the last Gold-rated choice is Michigan Education Savings Program, also Gold-rated. Tell us about that one.

Millson: It was upgraded last year to Gold from Silver. We upgraded it last year because of the strong track record of investment oversight that you're getting from the plan. But here you're also getting a progressive glide path. So, it's very well constructed, research-driven. The investment manager here, TIAA, focused on the age of beneficiary account open, which really informed the equity allocation across the glide path. So, very research-driven, which we like. You're also getting it at a very low fee because of the overall construction using low-cost index funds. Another strong plan that we look at as being a strong option for the future.

Dziubinski: Adam, considering that you can invest in a 529 outside of your state, should investors just stick from choosing one of these three Gold-rated plans if they're looking for a 529? What would be the reason for not going with one of these Gold-rated plans?

Millson: No, you don't have to stick with those Gold-rated plans. They are our highest-conviction view. So, we think that they are great offerings for education savers over time. But one item that doesn't factor into our ratings is the state tax benefit available to investors. And that's something that you should really keep in mind when you're looking at your own state's plan. We don't include those in our ratings because we rate plans on a national level, and the impact and the tax implications are different for different investors. So, it makes a little bit more difficult. But when you're looking at those tax benefits available to you, that can be strong and keep you in-state. So, essentially, if you're looking at that and you have a Medalist-rated plan with a strong tax benefit, it probably makes more sense to actually stay in-state than go directly to a Gold-rated plan. So, it's definitely something to keep in mind when you're looking and shopping around for 529 plans.

Dziubinski: Well, Adam, thank you for your time today and helping us uncover sort of what's behind these Gold-rated plans and also have us think a little bit more broadly about looking beyond these three. We appreciate your time.

Millson: Absolutely. Thanks for having me.

Dziubinski: I'm Susan Dziubinski with Morningstar. Thanks for tuning in.

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