In the 529 plan universe, four college savings plans reign supreme, according to Chicago-based Morningstar.
Morningstar also gave five of the plans negative grades, with warnings for investors to think twice and carefully research 529s before making the decision to invest.
Each year, Morningstar rates 529 plans across five key categories: Process, people, parent, price and performance.
In 2019, Morningstar identified 30 plans it deemed “best in class,” assigning them gold, silver and bronze ratings. Best-in-class plans tend to follow industry best practices and offer features like low fees, well-researched asset allocation approaches, robust investment selection processes, an appropriate set of options to meet various investor needs and strong oversight, Morningstar said.
The top four plans, which earned gold ratings, were direct-to-investor plans issued by Illinois, Virginia, Utah and California. California’s plan was upgraded to gold from a silver rating by the analysts because it plans to adopt progressive glide paths in its age-based portfolios starting in 2020.
“California is the first state to debut a progressive glide path with investment manager TIAA,” said Madeline Hume, an analyst on Morningstar’s research team covering multiasset strategies and one of the report’s authors, in a video discussing the report today. “They've come to this space before many of the other plans that have featured investment management by TIAA. And this progressive glide path is something that Morningstar considers an industry best practice. In addition, California leverages an open architecture model, which features investments from a wide range of excellent asset managers, including T. Rowe Price, DFA, Pimco and Metropolitan West, which we think is resulting in a fine option for college savers.”
Other plans rated gold were noted for the strength of oversight and program management, investment options and investment philosophy, and innovation. For example, Virginia’s Invest529 plan replaced an actively managed REIT fund with a blend of two direct real estate investment sleeves and a passively managed fund.
Thirteen 529 plans earned a silver rating from Morningstar, including four plans managed by Fidelity that were upgraded from a bronze rating in 2018. These Fidelity plans phased out their most expensive age-based options and added new investment offerings blending active and passive management, lowering overall costs. Another fund, Nevada’s The Vanguard 529 College Savings Plan, was downgraded to silver from gold because it hasn’t kept up with the trend of declining fees within 529 plans, Morningstar said.
“The Nevada Vanguard 529 plan has always competed on cost, and its once really robust cost advantage has eroded over the past couple of years,” said Hume. “It's no longer the cheapest plan, and it's no longer even in the top five cheapest plans. In fact, it's not even the cheapest plan that features investment management by Vanguard.”
Two plans made significant improvements in their ratings. The Florida 529 Savings Plan jumped from negative to a bronze rating after smoothing the glide paths within its age-based portfolios and lowering fees. Another, Minnesota’s College Savings Plan, jumped from neutral to a silver rating after announcing plans to roll out a progressive glide path for age-based portfolios and opening up its plan to investment managers like Vanguard and Dimensional Fund Advisors after it had previously only used TIAA-CREF funds.