Top College Savings Plans
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Date: August 23, 2016
Tax-advantaged college plans get their tax benefits from Section 529 of the Internal Revenue Code and are intended to encourage people to save for future college costs. All states and the District of Columbia offer 529 college-savings plans, and you don't have to pick the one in your state of residence.
All 529 college savings plans are not created equal, however. Some are not good deals because of high management fees and commissions. Morningstar, the Chicago-based financial information rating company, evaluates the plans every year and ranks them in Gold, Silver, Bronze, Neutral and Negative categories. Here's a list of the best of the best.
Alaska's T. Rowe Price College Savings Plan
Alaska's T. Rowe Price College Savings Plan earned Morningstar's top Gold ranking that was awarded to only four college savings plans in 2015. All four of the Gold plans are direct-sold plans, cutting out the middleman and eliminating commission advisers. Morningstar particularly likes the fact that the Alaska plan uses experienced T. Rowe Price as the program manager, taking advantage of the firm's excellent investment strategies without adding a layer of costs.
Maryland's College Investment Plan
Maryland's College Investment Plan is another Gold-rated plan that takes advantage of T. Rowe Price's investment and management team. Like the Alaska plan, Maryland's plan stands out from the crowd because it does not reduce the stock percentage of holdings in abrupt steps as the beneficiary gets older. Rather, the plan gradually reduces equity investment. This reduces the risk that the plan will move brusquely out of equities just after a market sell-off.
Nevada's Vanguard 529 College Savings Plan
You can't find a plan with lower management expenses than Nevada’s Vanguard 529 College Savings Plan. This Gold-ranked plan exclusively uses passively managed strategies. It's not the only plan to adopt a set of inexpensive Vanguard indexes, but this plan's economies of scale allow it to reduce fees below those of other plans. Nevada's Vanguard plan has nearly $11 billion in assets and is the second-largest direct-sold plan — meaning there’s no middleman — in the U.S.
Utah's Educational Savings Plan
The Utah Educational Savings Plan is also one of the top-ranked Gold plans. It keeps costs low for investors by offering, in the main, Vanguard index funds, which track broad market indexes rather than try to beat them. This is the plan to look at if you are an investor who wants to construct your own customized portfolio. You can opt for premixed offerings or design an age-based track, taking advantage of Vanguard's wide range of investment options.
Virginia's CollegeAmerica and Virginia529 inVEST
Virginia is doing something very right. Its two college savings plans — CollegeAmerica and Virginia529 inVEST — were among the four plans awarded Silver ratings by Morningstar for the past two years. These are advisor-sold, not direct-sold, plans, but — with $46 billion in assets — CollegeAmerica has more than twice the assets of the country's second-largest 529 plan. The state only has 2.6 percent of the national population, but captures 23 percent of the 529 plan market. Investors select from equity and balanced fund options from American Funds.
Ohio's CollegeAdvantage 529 Savings Plan
Ohio’s CollegeAdvantage is another plan that managed to hang onto its Silver status with Morningstar for the second consecutive year. It is attractive because it offers a nice variety of low-priced investment options, including an age-based track with both active and passive management, and three tracks that use only index funds.
Michigan's Education Savings Program
The Michigan Education Savings Program (MESP) also retained its Silver rating for 2015. The program's manager, TIAA-CREF, relies heavily on index fund options, which keeps costs low.
Illinois' Bright Directions College Savings Program
Illinois' Bright Directions College Savings Plan is advisor-sold, rather than direct-sold. This year it moved up from Bronze ranking to Silver ranking when it slashed management fees after renegotiating its management contract with Union Bank & Trust. Morningstar analysts note that Bright Directions also eliminated account setup and maintenance fees.
New York’s 529 Program
New York’s 529 Program uses exclusively Vanguard index options, so it is one of the cheapest plans out there. However, it had only earned a Bronze ranking in prior years because it did not include foreign stocks in its age-based and fixed allocation options. It was upgraded to Silver in 2015 when it added international stocks and bonds to its mix.
California's ScholarShare College Savings Plan
California's ScholarShare was able to move back up from Bronze ranking to Silver this year by switching out neutral-rated TIAA-CREF Bond Plus for Gold-rated Metropolitan West Total Return Bond. The direct-sell plan uses active managers, picking out the best-of-the- best investments without regard to fund company affiliation.