The plans given negative ratings—for the second straight year—were South Dakota’s CollegeAccess 529 and Arizona’s Ivy Funds InvestEd 529 Plan. The South Dakota plan is very expensive for out-of-staters, who comprise the majority of its assets. Morningstar’s chief concern with the Arizona plan is oversight issues.
Acheson said Ohio, Utah, Massachusetts and Michigan are solid states from an oversight perspective, given their strong stewardship of 529 plans and greater insulation from political changes and turmoil. Positive trends in the 529-plan industry include continued reductions in fees, greater diversification of investments and efforts to rein in exposure to moves in interest rates, he said.
Mark Kantrowitz, a nationally recognized expert on financial aid, recommended relying on 529 plan ratings from Morningstar and SavingForCollege.com, an independent college-savings website. “There are no other reliable ratings sources for 529 plans,” he said.
SavingForCollege.com’s “5-cap Rating” system factors in performance, costs, features and reliability. The top-rated plans receive five caps (mortarboard icons). Unlike Morningstar, SavingForCollege.com also rates prepaid-tuition plans that, like college-savings plans, fall under Section 529 of the federal revenue code. SavingForCollege.com gives plans separate ratings for residents and non-residents.
Several years ago, Kantrowitz developed a rule of thumb to compare two 529 plans when one offers a state income tax benefit but has higher fees. “If the state's marginal income tax rate is less than the product of the difference in fees and the number of years until college enrollment, then the 529 plan with the lower fees will yield a greater net return on investment,” he said. “This is an approximation, but it works well in practice.”
Acheson encourages advisors to seek strong 529 plans for their clients’ needs. Still, he added, “What’s probably more important is how frequently and how much clients are saving for college.”