Morningstar Lists Best 529 College-Savings Plans

Oct. 16, 2012 — -- intro: Investment ratings firm Morningstar released its annual ranking of 529 college savings plan on Monday, noting industry-wide improvements in plan fees and performance.

Almost every state offers a 529 savings plan, named after Section 529 of the Internal Revenue Code, describing how those who contribute to these investment vehicles don't have to pay taxes on proceeds. Benefactors, such as parents and grandparents, can start a plan for named beneficiary as soon as a child is born.

While you do not have to choose a 529 savings plan offered in your state, many states offer tax breaks if you do invest in their plans.

Laura Lutton, director of funds of funds research for Morningstar, said if you are going to consider a 529 savings plan for a child, it's best to start early, given the accelerating cost of college and that there are relatively few years to save, compared to retirement or other savings goals.

If you live in a state where there are tax benefits, in most states you give up those benefits if you choose another state's 529 plan.

Only five states allow you to apply that state's tax benefit to any 529 plan, regardless of its origin. Those states are Kansas, Missouri, Arizona, Maine and Pennsylvania.

Morningstar.com's 529 Plan Center features an interactive map that lists each state's plans and its tax benefits. For example, Ohio has two 529 plans that offer $2,000 in-state tax deductions for single or joint filers.

This year's list of the best plans are described by a new ranking of gold, silver, bronze, neutral and negative to match Morningstar's analyst ratings for mutual funds, so the descriptions can be more clearly interpreted for different investment vehicles, a spokesman said. In previous years, Morningstar rated ranked plans in several tiers: top, above average, average and below average.

The rankings are based on characteristics like price and performance, which allow analysts to estimate which plans are more likely to outperform over the long term on a risk-adjusted basis.

The 27 plans that received medals represent more than 95 percent of the $162 billion in 529 plan assets in the country.

The top-ranked plans this year have differing aspects, as usual. Some are direct-sold to parents or family members, while others are adviser-sold plans.

Lutton said plans in the industry continue to improve with quality investments since a decade ago, when they were first launched.

"Years ago, when the industry was getting started, those investments were tougher to come by. The plans were loaded with funds that weren't performing well," she said.

Also, costs to invest in these funds have also decreased, leading to incremental improvements in some plans that received a neutral rating this year, compared to a negative rating a year ago.

"I think that's a great trend that benefits all college savers," she said.

TIAA-CREF is the plan manager for two plans that represent the wide range of available choices. The Michigan Education Savings Program received a silver rating while Minnesota College Savings Plan received a negative rating.

"They have very similar indexed options for 7 to 12 year olds, but the Michigan plan charges 0.35 percent for its option and has negotiated much lower fees going forward, and the Minnesota plan charges 0.51 percent," Lutton said. "The Minnesota plan will always underperform the Michigan plan with that price differential."

Lutton said any of the plans that received a gold, silver or bronze medal may be a "good choice for parents or grandparents." They vary only by the conviction of how strongly Morningstar believes they will outperform.

Here is a list of the four gold plans and four silver plans Morningstar selected this year.

quicklist: 1category: Goldtitle: T. Rowe Price College Savings Plantext: Program Manager: T. Rowe Price Associates, Inc.

quicklist: 2category: Goldtitle: Maryland College Investment Plantext: Program Manager: T. Rowe Price Associates, Inc.

quicklist:3category: Goldtitle: Utah Educational Savings Plantext: Program Manager: Utah Educational Savings Plan

quicklist:4category: Goldtitle: The Vanguard 529 College Savings Plan text: Program Manager: Upromise Investments, Inc.

quicklist:5category: Silvertitle: iShares 529 Plantext: Program Manager: Upromise Investments Inc.

quicklist:6category: Silver title: Michigan Education Savings Programtext: Program Manager: TIAA Tution Financing, Inc.

quicklist:7category: Silvertitle: CollegeAdvantage 529 Savings Plantext: Program Manager Ohio Tuition Trust Authority

quicklist:8category: Silvertitle: CollegeAmericatext: Program Manager: American Funds