October 27, 2011 / 7:51 PM / 6 years ago

UPDATE 1-Morningstar 529 plan report cuts Maine, boosts Utah

* Maine plan slips to “below average” from “above average”

* Past regulatory issues, high fees cause for downgrade

By Jessica Toonkel

Oct 27 (Reuters) - Morningstar assigned top ratings to six of the nation’s best college savings plans, while downgrading Maine’s $5.3 billion 529 plan, which is run by Merrill Lynch, Morningstar said on Thursday.

The Maine downgrade -- due to regulatory issues regarding how Merrill advisers sold the plan -- is the latest hit to adviser-sold 529 plans, which have been losing market share to their direct-sold counterparts.

Earlier this month, the California state treasurer decided to shut down its adviser-sold 529. Overall adviser sold plans have lost 9 percent market share over the past five years.

The Chicago-based research firm downgraded the plan two notches to “below average” from “above average” in its annual 529 educational savings plan ratings report, which was published on Thursday.

The two-notch downgrade was the biggest Morningstar made for a 529 plan this year.

The move comes as part of a Morningstar study of 58 plans that manage more than 95 percent of the nation’s $133 billion 529 plan market. This marks the second year the firm has come out with ratings.

Morningstar also on Thursday assigned top ratings to large college-savings plans including:

Alaska’s T. Rowe Price College Savings Plan; Maryland College Investment Plan, managed by T. Rowe Price; Nevada’s The Vanguard 529 Savings Plan, managed by Upromise and Ohio’s CollegeAdvantage 529 Savings Plan, managed by Ohio Tuition Trust Authority.

Morningstar also upgraded the Rhode Island CollegeBound fund, which is run by AllianceBernstein , raising its rating to “below average” from its lowest “bottom” rating for adding some low-cost index fund options by The Vanguard Group.

Utah’s Educational Savings Plan was upgraded from “above average” to “top-rated” by Morningstar. The researcher upgraded the Utah Educational Savings Plan because it lowered its fees earlier this year and added a new investment option, which allows investors to customize their own target date funds.


In January, the Financial Industry Regulatory Authority censured Bank of America’s Merrill Lynch unit $500,000 for failing to have proper supervision in place over how its representatives were selling its adviser-sold plan, which is available nationwide.

Specifically, FINRA found that from June 2002 through February 2007, Merrill did not have proper procedures in place to make sure that its advisers took into account in-state tax benefits investors could receive from investing in their own state 529 plans, when selling them the NextGen plan, according to a January FINRA notice. As a result, investors who were sold the NextGen plan missed out on tax benefits.

“Presumably there were shareholders in the plan that shouldn’t have been there,” said Laura Lutton, editorial director at Morningstar.

“The downgrade should serve as a wake-up call to advisers selling nationwide 529 plans,” Lutton said. “Advisers need to make sure that if they are going to put a client in a national plan that they have done their homework and that there wasn’t a more suitable option with an in-state plan,” Lutton said.

Merrill took steps several years ago to make sure that its employees document that state tax advantages were discussed with clients, according to an e-mailed statement from a Merrill spokesman.

The fees of the Maine adviser-sold plan also are higher than the average, Lutton said. The average expenses of the NextGen adviser sold plan are 1.53 percent, compared to the average adviser sold plan, which is 1.47 percent. according to Morningstar.

NextGen is a multi-manager college savings plans, which has many investment choices and thus the fees may vary, the Merrill spokesman wrote.

Officials for the Finance Authority of Maine did not immediately return calls.

While Maine suffered the biggest downgrade, other state 529 plans did see a slip in their ratings. Alaska’s John Hancock Freedom 529 plan and South Dakota’s CollegeAccess 529 plan with Allianz Global Investors were both downgraded from “above average” to “average” over fees, Lutton said.

The Alaska plan’s average costs are 1.88 percent, while the South Dakota’s average costs are 1.66 percent. Both are adviser sold plans.

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