Morningstar names top-rated - and worst - 529 plans

T. Rowe, Vanguard, American offerings rank high; Alliance's CollegeBoundfund fares poorly

Oct 31, 2010 @ 12:01 am

By Jessica Toonkel

T. Rowe Price Group Inc., The Vanguard Group Inc. and American Funds are among the managers of the top Section 529 college savings plans, according to Morningstar Inc.'s new 529 ratings, which it released last week.

Specifically, Alaska's T. Rowe Price College Savings Plan, T. Rowe's Maryland College Investment Plan, Nevada's Vanguard 529 College Savings Plan, Ohio's CollegeAdvantage 529 Savings Plan by Vanguard and Virginia's CollegeAmerica Plan by American Funds were the five plans that received best-in-class ratings.

The Virginia plan, offered through Capital Research and Management Inc., was the only adviser-sold plan to receive a top rating.

The Rhode Island CollegeBoundfund received Morningstar's worst rating. Georgia's Path2College 529 plan (managed by TIAA-CREF), Nevada's Upromise College Fund 529 Plan and Wisconsin's Tomorrow's Scholar College Savings Plan (managed by Wells Fargo Funds Management LLC) all received below-average ratings.

Morningstar rated 52 of the 82 529 college savings plans available. The plans were evaluated on five measures: portfolio construction, performance, price, parent company and managers.

The low-rated Rhode Island CollegeBoundfund is run by AllianceBernstein Holding LP, which has seen four of its chief investment officers leave since 2008, said Laura Lutton, a Morningstar analyst who is in charge of the ratings.

“We have watched this firm very carefully, and they have a lot of performance issues,” she said.

AllianceBernstein disputed its ranking on Morningstar's list.

Turnover at the firm hasn't affected the portfolios in the 529 plan, said Patricia Roberts, managing director and senior 529 product manager at AllianceBernstein.

“The portfolio oversight and asset allocation team that has been running this product since its inception in 2000 has experienced no turnover whatsoever,” she said.

“It seems Morningstar chose to rely heavily on a highly subjective assertion about turnover in AllianceBernstein's management,” said Peter Kerwin, chief of program development for the Rhode Island Higher Education Assistance Authority. “I'm a little perplexed that a report that seems to pride itself on providing a quantitative, data-driven analysis seems to have fallen short of that standard in rating CollegeBoundfund.”

In Morningstar's ranking of 80 plans, in which it looked at performance, the CollegeBoundfund ranks 39th over a five-year period, said Michael Conrath, vice president and wealth planning director at AllianceBernstein.

“We are in the top half, based on Morningstar's own research,” he said.

Also, the plan's expenses for in-state residents are just 0.2% and 0.72% to 0.94% for investors who go through advisers nationally, Mr. Conrath said.

PRICEY OFFERINGS

The average operating expenses for a direct-sold 529 plan are 0.6% and 1.51% for adviser-sold plans, according to Morningstar.

Morningstar gave Georgia's plan a low rating because its expenses are higher than other plans managed by TIAA-CREF, Ms. Lutton said.

“Some of the index fund options are pricey — at 0.65%,” she said.

Chad Peterson, a spokesman for TIAA-CREF, didn't comment by press time.

Nevada's Upromise plan received a low rating because its costs are higher than Nevada's Vanguard plan, but the plans are almost identical, Ms. Lutton said.

The Vanguard plan, however, is for investors who have more to invest, said Karen E. Duddlesten, senior deputy treasurer with the Office of the State Treasurer for the State of Nevada.

The minimum investment for the Vanguard plan is $3,000; it's $250 for the Upromise plan.

“The Upromise College Fund 529 plan was really set up to work with much smaller savers,” Ms. Duddlesten said, noting that the plan offers matching grants for low- to moderate-income savers and other mechanisms to help smaller savers get involved in saving for college.

Morningstar will update its ratings annually.

“We think that this transparency is going to help grandparents and parents make better decisions,” Ms. Lutton said.

E-mail Jessica Toonkel at [email protected]

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