Better investment options and tax benefits helped more 529 plans make it on to Morningstar Inc.'s closely watched Analyst Ratings list for 2013.
The 64 plans rated in 2013 account for 98% of the more than $181 billion in plan assets. Of those 64, Morningstar considers 32 plans likely to outperform their peers over the long term, said Laura Lutton, Chicago-based director of Morningstar's funds of funds research.
For the past 10 years, which encompasses the lifespan of many 529 plans, Morningstar has rated the plans on five factors:
- strategy and investment process;
- risk-adjusted performance;
- the plan's manager;
- plan stewardship; and
- whether the investment options are a good value proposition compared to peers, including fees.
This year, seven plans were upgraded from last year's ratings, while only one plan was downgraded, due to pricing.
The four plans earning a gold rating — the top rating — this year all offer plans that are sold directly, rather than through financial advisers, where plans tend to be more expensive. “It's harder to get gold, just like in the Olympics,” said Ms. Lutton.
While the ratings are intended to be long-term assessments, “what surprises me is the number of changes and how they tend to improve year to year,” Ms. Lutton said in an interview.
One of those recent changes has been fees, “which tended to go down fairly meaningfully across the board,” she said. “As they get scale, they get more competitive. These plans eye each other all year long.”
The average total expense ratio for all 529 options is 1.13, with adviser-sold plans averaging 138 basis points, and direct-sold averaging 49.
The range for adviser-sold plans is up to 2.67, while direct-sold fees go up to 1.45.
Investment sophistication is another factor. “To win one of these (529 plan) contracts requires some decent investments” in addition to scale and relationships with plan administrators, said Ms. Lutton. “You've got to show a commitment to 529 to win these contracts.”
The variety of tax treatment and investment options vary widely by state, which is why Morningstar stepped in, said Ms. Lutton. “I feel a personal sense of pride that we're holding this industry accountable.”
