April 24, 2013 — -- intro: According to a new Morningstar report released this week, 529 college-savings plans are getting cheaper as fees decrease and choices increase. With the soaring cost of higher education, planning for children's education has taken on new importance.
The report evaluated all 86 U.S. 529 plans, which, as of Dec. 31, 2012, had more than $166 billion in total assets under management, a rise of 25 percent in 2012 from 2011.
Almost every state offers a 529, named after Section 529 of the Internal Revenue Code, which details how those who contribute to these investment plans don't have to pay taxes on proceeds. Benefactors, including parents and grandparents, can start a plan for a named beneficiary as soon as the child is born.
Laura Lutton, director of funds research for Morningstar, said there have been "meaningful declines in cost" for these plans.
"This is a sign that the 529 industry is maturing, and states are being more aggressive in how they negotiate with money managers," Lutton said.
And as with other funds, Lutton said decreasing fees were a consistent predictor of performance.
"The less you pay, the more likely you are to outperform in the long term," she said.
A 529 plan, however, might not be for everyone. Lutton said parents should consider two questions when investing in a 529. First, even though the fees are dropping, if you're putting in less than $2,000, which Lutton said was a low threshold, you might be better off investing your money elsewhere.
"I think there are a lot of parents who sign up for 529s with the best of intentions, and they don't end up contributing. Fees end up eating into their balance over the years," she said.
Second, parents should find out whether they live in a state with a tax benefit. Some states offer tax benefits, such as tax-deductible contributions, or funds matched by the state, for residents who purchase a 529 plan that originates in that state.
Only a handful of states allow benefactors to apply that state's tax benefit to any 529 plan, called tax parity, regardless of whether the benefactor lives in that state. Those states include Kansas, Missouri, Arizona, Maine and Pennsylvania.
Here are the 15 "cheapest" 529 plans, based on the average total expense ratio for that plan:
quicklist: 1category: South Carolinatitle: Future Scholar 529 (Direct) text: Average total expense ratio: 0.13 percent
quicklist:2category: New York title: New York's 529 Program (Direct)text: Average total expense ratio: 0.17 percent
quicklist:3category: Michigantitle: Michigan Education Savings Programtext: Average total expense ratio: 0.25 percent
quicklist:4category: Wisconsin title: EdVest 529 Plantext: Average total expense ratio: 0.25 percent
quicklist:5category: Utah title: Utah Educational Savings Plantext: Average total expense ratio: 0.25 percent
quicklist:6category: Iowatitle: College Savings Iowa 529 Plantext: Average total expense ratio: 0.28 percent
quicklist:7category: Nevadatitle: The Vanguard 529 College Savings Plantext: Average total expense ratio: 0.29 percent
quicklist:8category: Georgia title: Path2College 529 Plantext: Average total expense ratio: 0.34 percent
quicklist:9category: Ohiotitle: CollegeAdvantage 529 Savings Plantext: Average total expense ratio: 0.35 percent
quicklist:10category: Missouri title: MOST Missouri's 529 Plantext: Average total expense ratio: 0.35 percent
quicklist:11category: California title: ScholarShare College Savings Plantext: Average total expense ratio: 0.36
quicklist:12category: North Carolina title: National College Savings Programtext: Average total expense ratio: 0.37 percent
quicklist:13category: Alabamatitle: CollegeCounts 529 Fundtext: Average total expense ratio: 0.38 percent
quicklist:14category: Connecticut title: Connecticut Higher Education Trusttext: Average total expense ratio: 0.40 percent
quicklist:15category: Illinois title: Bright Start College Savings (Direct)text: Average total expense ratio: 0.41 percent