Before investing in a 529 college savings plan, do some due diligence
If you're a parent or a college student and you're worried about the escalating cost of a higher education, you've probably wondered how to pay for college. I know the inclination now is to flee to the safety of a savings account. Despite the tumultuous stock market, I still believe that a 529 college savings plan is a good long-term strategy. But if you are going to invest in a 529 plan, make sure you don't just "set it and forget it."
In its sixth annual survey of the best and worst 529 college-savings plans, Morningstar Inc. criticized several plans for maintaining too-aggressive asset allocations for students nearing, or already in college. Morningstar also smacked some plans for sticking too long with floundering investments.
The study focuses on several areas: the underlying funds, expenses, diversification, asset allocation, and flexibility.
"Unfortunately, the past year hasn't been so rosy in the college savings universe," said Greg Brown, a Morningstar analyst and author of the 529 study.
There are two types of 529s: prepaid tuition plans and savings plans. A prepaid plan allows you to pay for tuition in advance. The more popular plan allows you to invest in a tax-deferred investment account. Money withdrawn from a 529 investment is free from federal tax (and in most cases state taxes as well) when used for qualifying college costs.
Although the 529 plans are state-sponsored, you can invest in any plan regardless of where you live. And money invested in a 529 plan can be used for a state or private institution.
Morningstar's report reinforced that you need to keep track of a 529's performance, fees, and investment options. The company was particularly critical of plans that didn't adjust their age-based portfolios to decrease market risk.
Morningstar gives high marks to 529 plans that keep fees low and have "sensible" allocations among stocks, bonds, and cash that are appropriate for the beneficiary's age. Morningstar also looks for diversification that includes foreign bonds, real estate investment trusts, and Treasury inflation-protected securities.
So which plans made it to the top of Morningstar's ranking? Here are the five best 529s listed by name and plan manager: Ohio CollegeAdvantage, Ohio Tuition Trust Authority; Indiana CollegeChoice 529 Direct Savings Plan, Upromise Investments, Inc.; Utah Educational Savings Plan Trust, UESP Trust; Virginia Education Savings Trust, Virginia College Savings Plan Board; and Virginia CollegeAmerica 529 Savings Plan, American Funds.
And the worst: Nebraska State Farm College Savings Plan, OppenheimerFunds; New Jersey Best 529 College Savings Plan, Franklin Templeton; Montana Pacific Life Funds 529 College Savings Plan, Pacific Life Funds; Ohio Putnam CollegeAdvantage, Putnam; and Nebraska AIM College Savings Plan, Invesco Aim Capital Management.
For Morningstar's complete 529 plan analysis, go to www.morningstar.com.
Michelle Singletary is a columnist for The Washington Post. 