Rating the Best 529 College Savings Plans
Parents have been turning to so-called 529 plans to save for their children's college education, and Morningstar is making the selection process simpler by outlining the wide disparity in performance, costs and variety of investment options in the dozens of state plans available.
Morningstar started its 529 survey in 2004, and Utah and Virginia have been at the top of the lists since then. Nebraska, Colorado and Maryland are also rated high.
Alabama has been on the worst list for the third year in a row because of its high costs and few investment options. Also on the worst list are Nebraska's AIM College Savings Plan and broker-sold offerings from Alaska, Missouri and West Virginia. Generally, fees are high and funds are lackluster, Morningstar said. Wyoming's College Achievement Plan, which remained on the worst list every year, merged with Colorado's plan last year.
The 529s are named after the part of the tax code. Parents deposit their after-tax income into mutual funds, usually, and the distributions are not subject to federal income tax as long as the money is used for higher education. Congress made the tax breaks permanent last year. The tax advantage was originally set to expire at the end of 2010.
Investors need an advisor to get into a plan outside their home state. Sometimes, plans are so good it's worth playing the sales commissions. But Smartmoney.com warns: “Most direct-sold funds still tend to outperform advisor-sold funds, once commissions come into the mix. You need to do your homework to find out if a load makes sense for you.”
Morningstar's report said of the top plans:
• Virginia's CollegeAmerica plan, run by Capital Research & Management Co.'s American Funds, is the largest in the country. Costs are relatively low and underlying funds are steady and well-managed.
• Utah Educational Savings Plan, run by the state, has a varied lineup of portfolios and low annual expenses, which mostly range from 0.25% to 0.38% across its portfolios.
• The College Savings Plan of Nebraska, run by Union Bank & Trust Co., offers low-cost index funds from Vanguard Group as a core holding in its portfolios. Parents can also add on offerings from American Century Investments, Fidelity Investments and Pacific Investment Management Co., or Pimco.
• The Maryland College Investment Plan, run by T. Rowe Price Group Inc., has reasonably priced investments, a sound asset-allocation strategy, and it provides Maryland residents with a state tax deduction.
• Colorado's Scholars Choice College Savings Program, run by Legg Mason Inc.'s CAM North America LLC business, added a range of investment options last year.
Find the complete report at