Morningstar’s Best and Worst 529 College Savings Plans

Really, I almost got a heart attack when I saw Ohio CollegeAdvantage is among the worst college savings plans published by Morningstar yesterday because that’s the one I opened for our younger daughter last year. Fortunately, what I have isn’t exactly what’s named in the Morningstar list.

Anyway, Morningstar yesterday published its annual ranking of the best and worst college savings plans. Five plans are chosen as the best 529 plans because of their superiorities in fees, investment diversification, plan flexibility and fund choices compared to their peers.

• llinois Bright Start College Savings Program (OppenheimerFunds): This plan charges 0.20% to 0.23% for index portfolios and 0.38% to 0.63% for actively managed portfolios and there’s a $10 annual fee for each index portfolio. It requires only $25 to start the plan and $15 minimum in subsequent investments. The plan is managed by OppenheimerFunds and Vanguard.
• Maryland College Investment Plan (T. Rowe Price): This plan is also one of the best in last year’s ranking. It charges $25 account fee annually plus 0.28% program fee. The underlying funds’ expense ratio range from 0.40% to 0.69%. The minimum initial investment is also $25. For Maryland residents, up to $2,500 contribution can be deducted from state taxable income.
• Virginia CollegeAmerica (American Funds): Another winner in the 2007 ranking, Virginia CollegeAmerica plan is a broker-sold college savings plan which offers 22 American funds. The plan charges $10 for opening an account as well as $10 annual account fee. The expense ratio of this plan ranges from 65% to 1.10%. Virginia residents who participate in this plan can deduct up to $2,000 ($4,000 beginning 2009) from state income.
• Virginia Education Savings Trust (Virginia): VEST plan give investors a large selection of index funds and actively managed funds in age-based portfolios. Plan managers include Vanguard, Templeton, and American Funds. The plan charge $25 when an account is opened plus $10 annual fee. Expenses of underlying funds are between 0.06% and 0.32%. $2,000 contribution to the plan can be deducted annually for Virginia residents.
• Colorado Scholars Choice College Savings Program (Legg Mason): This is another broker-sold plan. The plan doesn’t charge fee for opening an account, but there’s an annual maintenance fee of $20 for assets below $2,500. In addition to the funds’ expenses, the plan also adopts a portfolio-based fee structure, making more complicated than other plans. Contributions are tax deductible for Colorado residents only.

There are also five plans named by Morningstar as the worst:

• 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))

The main reasons for those plans being put on the worst list are: 1) high costs; 2) lack of diversification; and 3) quick management changes, which are bad for long-term investments such as saving for college. I am using Ohio CollegeAdvantage, but, fortunately, it’s not the Putnam broker-sold plan. For me, when the most important element to consider when choosing a 529 plan is costs, which include both the administrative fees and funds’ expenses, followed by investment choices. State income deduction isn’t really an issue as I didn’t want to be restricted to the state’s plan for the tax incentive. I’d rather choose a plan that’s available nationally with low costs and solid performance.

Which plan are you using?

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