Investment research firm Morningstar has released their annual 529 College Savings Plans Research Paper and Industry Survey. While the full survey appears restricted to paid premium members, they did release their top-rated plans for 2014. Remember to first consider your state-specific tax benefits that may outweigh other factors. If you don’t have anything compelling available, you can open a 529 plan from any state.
Morningstar uses a Gold, Silver, or Bronze rating scale for the top plans and Neutral or Negative for the rest. The criteria include five P’s:
- People. Who’s behind the plans? Who are the investment consultants picking the underlying investments? Who are the mutual fund managers?
- Process. Are the asset-allocation glide paths and funds chosen for the age-based options based on solid research? Whether active or passive, how is it implemented?
- Parent. How is the quality of the program manager (often an asset-management company or board of trustees which has a main role in the investment choices and pricing)? Also refers to state officials and their policies.
- Performance. Has the plan delivered strong risk-adjusted performance, both during the recent volatility and in the long-term? Is it judged likely to continue?
- Price. Includes factors like asset-weighted expense ratios and in-state tax benefits.
Here are the Gold-rated plans for 2014 (no particular order):
- T. Rowe Price College Savings Plan, Alaska
- Maryland College Investment Plan
- Vanguard 529 College Savings Plan, Nevada
- Utah Educational Savings Plan
Here are the consistently top-rated plans from 2010-2014. This means they were rated either Gold or Silver (or equivalent) for every year the rankings were done from 2010 through 2014.
- T. Rowe Price College Savings Plan, Alaska
- Maryland College Investment Plan
- Vanguard 529 College Savings Plan, Nevada
- CollegeAdvantage 529 Savings Plan, Ohio
- CollegeAmerica Plan, Virginia (Advisor-sold)
I collected the previous individual year rankings from 2010-2013 last year. Utah only missed on out the consistent list because they weren’t top-ranked in 2010.
Again, either you go for the in-state tax savings, or pick a top plan from any state. Ignoring state tax differences, my standard recommendation is to pick either Nevada or Utah, although many other state plans may have specific investments that will work just fine. The Vanguard-branded 529 Plan has low costs, decent investment variety, and a long-term commitment to passing on future cost-savings. The Utah 529 plan has very low costs and is highly customizable for DIY investors.
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I’m in Maryland, which has a gold rated plan, but I still think I’ll choose the Vanguard Nevada plan. If the goal of the 529 is to pay for college, than I’ll take the lower expense ratios rather than the tax deduction. The tax deduction goes back into my pocket, not my child’s.
The tax deduction goes into whatever pocket you want it to go into. You could easily pass that on to your child as well by investing the tax savings into the 529. I live in NY and use the NY plan. The NY plan has access to some Vanguard funds, keeping expenses low. But unless your local, tax-advantaged plan has awful expense ratios, I would think in most cases the upfront tax savings would outweigh any very small expense-ratio advantages over an 18-year plus time horizon. And if your child will be attending college in 10 years or less, the tax advantages will probably outweigh even large differences in expense ratios.
I would double check any recommendations coming from Morningstar. Their gold vs silver vs bronze seem at times either dated or random. For example, if you compare the Nevada vs the NY plan, the NY numbers look better. Lower expenses for NY (0.16), lower initial investment ($25!) and lower minimum contribution ($25). NV is 0.21, $3000, $50. Both use the same program manager (Ascensus) and investment manager (Vanguard). Investments are all the same Vanguard investments. I’d go for NY. The NY plan would be especially great for someone just starting out, but heck the numbers tell me it’s better period regardless of situation.
I also live in MD and have been using the MD plan for several years. The fee on their long-dated target date fund is about 67 bps (.67%). I just looked and the fee on Vanguard’s comparable product is .19%. The tax advantage allows me to recoup about 8% of my contributions to the MD plan up to $10k. The simple breakeven to get ahead on the Vanguard cheaper option versus contributing 8% more to the MD plan is over 16 years. Most of the contributions (those made after my children turn 6) will be at work less than 16 years, so I think I’m better off with the T.Rowe Maryland plan. In truth those extra $800 of contributions are going to be compounding each year, so the true economics are probably even more favorable.
Your math may vary.
For the life of me I don’t understand why Illinois doesn’t make the list, or at least get discussed as a runner up.
…follow up to last post, I’m talking the direct sold Bright Start Illinois plan.
Just a friendly reminder, the T. Rowe Price Alaska fund is NOT for “The Poors”. They charged me a mandatory $10 annual fee in 2014 because I did not have $50,000 total and did not contribute the monthly minimum $50. There were no other ways to avoid the $10 fee at the time so they charged me $10 plus standard fees on my $350 investment. If you’re rich it might seem the way to go, as for “The Poors”, piss on them…
I also have the Utah Educational Savings Plan and Arizona’s Fidelity Plan, they had no ridiculous charges and have performed solidly (currently up 10.1% in AZ Fidelity), I would recommend one of those.