Moringstar: The Best and Worst 529 College Savings Plans

Early last week, Morningstar released its annual evaluation of 529 college savings plans. According to Morningstar, qualities of 529 plans continued to improve in the past couple of years as plan providers reduced fees (both Fidelity and Vanguard have lowered fees of their college savings products) and eliminated high-price offerings. Good news for parents who use 529 plans to fund their children’s future education also came from the Congress as the federal tax breaks for 529 plans, which were originally set to expire in 2010, have been made permanent by the Pension Protection Act of 2006. The change of the tax law removed one major hurdle which has been seen in the past as preventing the plan from becoming more popular. In fact, according to Investment Company Institute, the growth of 529 plans has picked up speed in recent years and the new tax law will only fuel the momentum.

While giving with state-sponsored 529 plans which offer tax-incentives remains the first choice for parents, Morningstar cautions that the incentives “don’t necessarily overcome the disadvantages of a poor or costly plan.” In reviewing more than 80 college savings plans offered in 48 states and the District of Columbia, Morningstar put a great deal of emphasis on such critical aspects as plan costs, diversification, and asset allocation (which also happen to be the core of building a sound personal investment portfolio). The top five 529 college savings plans are:

Plan	Provider	Fees	ER
Colorado Scholars Choice	Legg Mason	3.5% front-end load 0.1-1.09% management fee $20 maintenance fee*	0.49-0.91%
Maryland College Investment Plan	T. Rowe Price	0.28% management fee $25 maintenance fee**	0.41-0.71%
Nebraska College Savings	Union Bank & Trust	0.6% management fee $20 maintenance fee	0.05-1.04%
Utah Educational Savings	Vanguard	0.25% management fee max. $25 maintenance fee	0.03-0.14%
Virginia CollegeAmerica	American Funds	5.75% front-end load $10 maintenance	0.42-1.9%

Among them the Colorado plan and Virgina plan are sold through financial advisors or brokers (therefore, the front-end load), while the other three are direct-sold plans. One of the main features of these plans is that they all have relatively low costs.

At the other end of the spectrum, the report also named 6 worst 529 plans:

Plan	Provider	Fees	ER
Alabama Higher Education 529	Van Kampen	0-1.1% management fee $25 maintenance fee	0.78-1.5%
Alaska John Hancock Freedom 529	John Hancock	0.75-1.65% management fee $30 maintenance fee	0.33-1.35%
Missouri MOST 529 Advisor	Upromise	0.3% management fee $25 maintenance fee	0.45-1.95%
Nebraska AIM College Saving	AIM	0.35-1.1% management fee $25 maintenance fee	0.86-1.54%
West Virginia Cornerstone SMART529	Hartford	0.47% management fee $25 maintenance fee	0.54-1.24%
West Virginia Leaders SMART529	Hartford	0.44% management fee $25 maintenance fee	0.52-1.22%

and, as compared to the best plans, they all have higher fees and ERs. Also, as noted by Morningstar, these plans don’t offer an appealing line of products.

* $20 maintenance fee is waived for Colorado and Wyoming residents and for more than $2,500 account balance.
** $25 maintenance fee is waived for direct payroll contributions, or a balance of $25,00o.

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