Morningstar: 529 college savings plans up in 2012 despite some lags

NEW YORK (Reuters) - Families saving for college poured billions of dollars into U.S. 529 education savings plans over the past five years, even as these plans’ performance lagged behind other investments like mutual funds, investment research company Morningstar Inc said on Monday.

Total assets in all 86 U.S. education savings plans - named 529 plans after a section in the Internal Revenue Code - rose 25 percent to $166 billion in 2012, according to Morningstar. In contrast, the benchmark U.S. Standard & Poor’s 500 index gained 13.4 percent. Inflows into 529 investments were about $14.7 billion last year, according to Morningstar data.

The popularity of the plans, operated by states and educational institutions, has soared in part because earnings are not subject to federal tax, and are generally not subject to state tax.

These plans can offer “growth in a tax-sheltered environment, and, depending on where they live, a lot of people have access to some nice state income-tax deductions,” said Kailin Liu, a fund analyst for Morningstar, in Chicago.


Still, most 529 investment options have lagged their non-529 peers. On average, intermediate-term bond 529 investments returned 4.4 percent, annualized over the five years ending January 31, while intermediate-term bond mutual funds were up 5.7 percent, according to Morningstar data.

“These numbers may suggest that 529 program managers have selected poor underlying funds, but it’s more likely that expenses are to blame,” the Morningstar report said. “Historically, 529 investments have cost more than mutual funds, and those higher expenses have dragged on long-term returns.”

In 2010, 529 investments charged as much as 40 basis points more, on average, than the analogous open-end fund peer group, Morningstar found. The fees have fallen since then, Morningstar said. For example, the typical large-blend 529 investment charged 1.05 percent as of January, down from a charge of 1.13 percent in 2011, according to Morningstar data.

“The 529 investments have improved considerably in the past several years,” Liu said. “Overall, expenses have gone down while quality of the underlying investments has gone up.”


Four savings plans received the coveted “Gold” Morningstar analyst ranking.

The Maryland College Investment Plan, the T. Rowe Price College Savings Plan for Alaska, the Vanguard 529 College Savings Plan for Nevada and the Utah Educational Savings Plan are “best of breed” based on Morningstar analysts’ evaluation of each plan’s investment options while also considering their objectives, appropriate benchmarks, and peer groups.

The Schwab 529 College Savings Plan for Kansas came in at the bottom of the rankings with a “Negative.” Negative-ranked plans “possess at least one flaw that we believe is likely to significantly hamper future performance, such as high fees or an unstable management team,” Morningstar said in its report.

Editing by Jan Paschal