BOSTON — College savings plans offered through the states of Alaska, Maryland, Nevada and Utah earned top marks from Morningstar Inc. in the company’s annual update to ratings of so-called 529 plans.
Another four plans received second-rung silver-medal ratings from Morningstar, which found that many of the state-sponsored plans reduced fees and improved investment options over the past 12 months.
The Chicago-based company is best known for its research on mutual funds, but it also rates 529s, named after the federal tax code that created them in 1997. States set their own guidelines for these investment accounts, which permit withdrawals for college expenses to be made free of federal taxes.
The plans are popular because of the tax benefits they offer, compared with stashing savings in bank accounts or certificates of deposit. Investors aren’t limited to investing in their own state’s plan. However, there’s frequently an incentive because about two-thirds of states extend state tax deductions or credits to residents.
Some plans are “direct-sold,” meaning that parents can open accounts directly through an investment firm or the state plan administrator. “Adviser-sold” plans are available through financial advisers. They generally charge higher fees than direct-sold plans but come with professional advice. Some states offer more than one plan, and investment options vary within plans.
In its ratings update Monday, Morningstar assessed 64 plans that manage more than 95 percent of the total assets in 529s. Plans were rated from gold, silver and bronze down to “Neutral” and “Negative,” the scale used for Morningstar’s Analyst Ratings method.
Analyst Ratings were introduced for mutual funds last year to supplement the company’s better-known 1- to 5-star scale ratings, which are primarily based on past investment performance.
Analyst Ratings of 529s attempt to subjectively assess a plan’s prospects by weighing factors including the quality of the managers and researchers directing the plan’s investments; the approach taken by state officials sponsoring the plan; the level of investment and administrative expenses charged; and past performance.
Morningstar employed the same methodology to rate 529s last year, but the five-level ratings were expressed as “Top” down to “Bottom.”
Each of the four plans earning gold-medal ratings this year also won top marks last year. Here are this year’s top-ranked plans, in alphabetical order, with the sponsoring state, and the plans’ managers:
n Alaska’s T. Rowe Price College Savings Plan, managed by T. Rowe Price
n Maryland College Investment Plan, also run by T. Rowe Price
n Nevada’s The Vanguard 529 Savings Plan, managed by Upromise Investments Inc.
n Utah Educational Savings Plan, managed by the agency of the same name
Four plans received silver-medal ratings, including two that moved down to the second-tier group after winning top marks last year. Those two are Ohio’s CollegeAdvantage 529 Savings Plan, managed by the Ohio Tuition Trust Authority, and Virginia’s CollegeAmerica, managed by American Funds.
The two other plans winning silver-medal honors were Arkansas’ iShares 529 Plan, run by UPromise Investments, and the Michigan Education Savings Program, run by TIAA Tuition Financing Inc.
Nineteen plans were rated bronze and 33 neutral. Four received negative ratings, compared with none receiving Morningstar’s lowest rating last year.
“Over the past 12 months, we continued to see 529 plans push for lower fees and higher quality investment options, and both of these trends directly benefit college savers,” said Laura Pavlenko Lutton, who oversees Morningstar’s 529 ratings. “Unfortunately, not all plans have jumped on these investor-friendly trends, and in a handful of cases where we found high expenses or poor-quality investments, we gave the plan a negative rating.”
The four negative-rated plans are: Kansas’ Schwab 529 College Savings Plan, managed by American Century Investment Management; Minnesota’s College Savings Plan, run by TIAA Tuition Financing; and the direct-sold and adviser-sold plans from Rhode Island’s CollegeBoundfund, managed by AllianceBernstein.
For a list of Morningstar’s ratings on each of the 64 plans, visit www.tinyurl.com/9rgtwme A written summary of the ratings is also available at www.tinyurl.com/d5c64rz
