By Liz Weston
LOS ANGELES, Dec. 2 College savings plans are
better deals than they were a few years ago, but there are still
a few clunkers out there. If you're invested in one, now may the
time to think about making a change.
Each fall, investment research firm Morningstar
singles out the nation's best 529 college savings plans. That
gives you a chance to compare the plan you're using to a gold
standard. If the gap is wide, and tax considerations or other
benefits don't compel you to stay, shifting to another state's
plan could give you better returns, lower costs or both.
For the uninitiated: 529 plans are sponsored by states and
run by investment management companies. Withdrawals from the
accounts can be used tax-free to pay for qualified education
expenses at any college or university in the country. In
addition, many states offer tax breaks for their residents and a
few offer matching funds.
The plans are extremely diverse in their investment options,
management strategies and fees, but overall have improved
significantly, said Laura Lutton, Morningstar's 529 expert and
director of its funds of funds research.
"The days of plans being filled with really gross investment
choices are behind us," Lutton said.
Still, some plans stand out as superior, Lutton said.
Morningstar named as the country's best plans the T. Rowe Price
College Savings Plan in Alaska, the Maryland College Investment
Plan, the Vanguard 529 College Savings Plan in Nevada and the
Utah Educational Savings Plan. The plans benefit from solid
management, good investment options and reasonable fees, said
Morningstar, which gave them a "gold" rating.
The next-best plans, winning a "silver" rating, were the
iShares 529 Plan in Arkansas, Scholarshare College Savings Plan
in California, Michigan Education Savings Program,
CollegeAdvantage 529 Savings Plan in Ohio and Virginia's
Twenty-three plans received a "bronze" rating and 28 were
rated "neutral." Morningstar said the bronze plans "have
well-executed strategies at a fair price" and that what
separated bronze from neutral plans was often the state's tax
benefits, with better benefits meriting the higher status.
The four plans cited as the worst include the Schwab 529
College Savings Plan in Kansas, the Minnesota College Savings
Plan and two Rhode Island plans, CollegeBoundfund and
CollegeBoundfund Direct. Rhode Island's investment options
suffered from poor performance while the plans in Kansas and
Minnesota were hampered by high fees, Morningstar said.
The federal law that governs 529 plans allows account owners
to switch plans once every 12 months. Investors can get around
that limit by changing beneficiaries, or the person whom the
account is supposed to benefit, said 529 expert Joe Hurley, who
founded the SavingForCollege.com site. The beneficiary can be
changed back to the original person after 12 months.
Sometimes tax breaks and matching grants can make staying in
a less-than-optimal 529 plan worthwhile. That's not the case
with Minnesota, which offers neither benefit. Kansas, however,
offers matches to low-income families. The state also gives
residents a tax deduction - up to $3,000 per beneficiary for
singles and $6,000 for couples - but they can get the write-off
for investing in any state's plan.
Rhode Island's tax deduction, meanwhile, is limited to $500
for individuals and $1,000 for married couples. Rhode Island has
a one-time "baby grant" of $100 for families who open 529
accounts in the state and a matching grant program for low- and
moderate-income families that was closed this year to new
Investors who don't want to lose such benefits could
consider making the best of what their plan offers, Lutton said.
The Rhode Island plan, for example, suffered in the Morningstar
ratings because the age-based investments run by
AllianceBernstein lagged in performance. But the plan also
offers low-cost Vanguard options for investors willing to do
their own asset allocation, Lutton said.
Another option is to take advantage of the best your plan
has to offer - such as a superior bond fund - and then open an
account in a different state's plan for the rest of your asset
allocation. (There's no limit on how many states' plans you can
Hurley recommends calling your current plan to ask about tax
and other consequences of moving, since some states require
residents to pay back any tax benefits they've received if they
move the money out of state.
If tax or other benefits don't tie you to your state,
though, your best move is likely into one of the top-rated
"If you're in a state where there are no local benefits,"
Lutton said, "then go for it."