Morningstar Top 529 College Savings Plan Rankings 2016

mstarlogoInvestment 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 2016. This is still useful as while there are currently 84 different 529 plan options nationwide, the majority are mediocre and can quickly be dismissed.

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 (although I would only pick from the ones listed below). Also, if you grab some tax benefits now but they are discontinued later, you can roll over your funds into another 529 from any state.

Here are the Gold-rated plans for 2016 (no particular order). Morningstar uses a Gold, Silver, or Bronze rating scale for the top plans and Neutral or Negative for the rest.

Newcomer Virginia529 inVEST was upgraded from Silver to Gold, helped by a recent management fee reduction. Missing from last year are the T. Rowe Price College Savings Plan of Alaska and the Maryland College Investment Plan (T. Rowe Price), which were downgraded from Gold to Silver. Reasons for this include fees staying average when the competition overall got cheaper, while at the same time some of the underlying actively-managed funds received lower Morningstar fund ratings.

Here are the consistently top-rated plans from 2010-2016. This means they were rated either Gold or Silver (or equivalent) for every year the rankings were done from 2010 through 2016.

  • 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)

The trend here is consistency. There was no change in either of the lists above as compared to last year. Utah only missed on out the consistent list because they weren’t top-ranked in 2010.

The “Five P” criteria.

  • 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.

A broad recommendation is to simply stick with one of the plans listed above unless your in-state plan is offering significant tax breaks. Many other state plans may have specific investments that will work just fine as well. Here are my personal favorites, and why:

  • The Nevada 529 Plan for its low costs, variety of Vanguard investment options, and long-term commitment to consistently lowering costs as their assets grow. The Vanguard co-branding is also a sign of positive stewardship.
  • The Utah 529 plan has low costs, includes a nice selection of Vanguard and DFA funds, and is highly customizable for DIY investors. Over the last few years, the Utah plan has also shown a history of passing on future cost savings to clients.

I feel that a consistent history of consumer-first practices is important as the quality of all 529 plans can change with time. Sure, you can move your funds if needed, but wouldn’t you rather watch your current plan just keep getting better every year?

Comments

  1. NY’s 529 plan should be part of this list. I am not sure why it has not made this list. Its expenses are probably the lowest and has Vanguard funds. Just looking at Vanguard Age based Aggressive fund the expenses are 0.16% as compared to Nevada offering the same fund at 0.17%.

    • I get this comment every year. NY is a Silver plan, so technically it is in the top 13. Expenses aren’t the only criteria that M* uses. From the 2015 article:

      “Morningstar also upgraded three plans to Silver from Bronze in 2015 thanks to various improvements made by the plans. New York’s 529 College Savings Program previously omitted foreign equities from the age-based and static allocation options, though it lacked a solid investment-based reason for doing so. It addressed that shortcoming in July 2015, adding international stocks and bonds to the mix. The plan uses all Vanguard index options and remains one of the industry’s cheapest direct-sold programs.”

  2. Scott Guirlinger says:

    Rock on Virginia!

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