Just two of the 10 largest 529 college savings plans by
assets received the highest marks in Morningstar’s annual ratings. Another
three of the 10 largest plans came in the second- and third-place categories,
graded on their ability to outperform and to help parents and other investors
meet their savings goals.
The remaining four received a “neutral” or average rating,
and one was excluded from the rankings altogether. The largest plans with
Morningstar’s highest “Gold Analyst Rating” are Nevada’s Vanguard 529 College
Savings Plan and the Utah Educational Savings Plan, which uses mutual funds
from both Vanguard Group and Dimensional Fund Advisors.
For investors, the findings underscore the importance of
considering factors beyond a plan’s popularity and size before choosing it.
To determine a plan’s rating, Morningstar weighed several
factors: the plan’s investment process, its performance, its fees, its
investment managers, and its oversight—which includes the state and program
manager, whose duties vary but often include providing marketing services,
record keeping and customer service for the plan’s investors. The
investment-research firm also considers any state-tax benefits for in-state
investors in how they help offset subpar investments or high fees.
The firm downgraded 10 plans this year, while upgrading just
five, out of a total of 64 of the country’s largest 529 savings plans that it
ranked. Many states have more than one plan, often one that investors can sign
up for directly and another distributed through financial advisers. The two
sets of plans are evaluated separately.
The rankings are closely watched by the plans’ investment
managers, which have been trying to boost enrollment and contributions that
have stalled in recent years. Many plans have been adding new investment
options and tweaking portfolios in an attempt to provide more
diversification and better returns for investors.
Nevada’s Vanguard plan and Utah’s Educational Savings plan
had $10.4 billion and $7.5 billion in assets, respectively, at the end of
September, according to Morningstar.
Neutral ratings went to a total of 32 plans. That included,
from the 10 largest plans, the Massachusetts and New Hampshire savings plans
managed by Fidelity Investments that investors can sign up for on their
own—which have $4.7 billion and $9.5 billion in assets.
Rhode Island’s adviser-sold plan, which is managed by
AllianceBernstein, wasn’t part of this year’s rankings because it added a
series of age-based options that tracks a Morningstar index this year. The plan
has $7.3 billion in assets. Morningstar says it doesn’t provide ratings or
opinions on 529 plans where one or more of the underlying investments tracks
one of its indexes.
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