Morningstar Advisor - Summer 2008 - (Page 38)

Spotlight Best and Worst 529 College-Savings Plans By Marta Norton Across the nation, many states clean up their messes, while others continue to offer bad plans. The country’s 529 college-savings plans continue to get better. Several years ago, many were high-cost messes. Since then, some have been spruced up, and others have been shut down. The important thing is that more people using these vehicles to save for college are getting a good deal. In 2007, West Virginia folded two exorbitantly expensive plans into a cheaper Hartford plan, and Pennsylvania merged its advisor-sold plan into its direct-sold offering. Most recently, Tennessee’s BEST Savings Plan, which offered college savers limited options, closed its doors May 30. We’ve been particularly pleased to see some of the worst plans clean up their acts. It still isn’t perfect, but North Dakota’s College SAVE Plan changed for the better when it dropped its growth-leaning Morgan Stanley lineup for an assortment of stellar Vanguard index funds. As a result, it is a bit better diversified now. And although it still has a few pricier funds in the mix, Missouri’s MOST 529 Advisor Plan added better funds and cut its formerly excessive expenses to a more reasonable level. Even some of the industry’s better plans continue to improve. Michigan Education Savings Program, managed by TIAA-CREF, lowered its fees in 2007. It now offers its assortment of well-diversified age-based and static portfolios to residents and nonresidents alike for just 45 basis points. Likewise, the program-management fee at the respectable Kansas plans fell significantly in 2007. Our Criteria mutual funds. As far as the underlying funds go, we look for seasoned managers, shareholderfriendliness, and sensible strategies. We’ve found that these qualities put investors in a good position to earn strong long-term returns. As always, we remind advisors and investors not to ignore home-state plans, given the tax deductions and tax-free earnings growth often available to in-state residents. Still, the tax breaks don’t necessarily validate an otherwise poorly designed plan, so it pays to look around. A word to those who have used our best and worst lists in the past. We continue to stand behind the picks of earlier years, but this year’s list is a snapshot of where the industry stands today. If you’ve made a selection from a previous best list, you’re still in great hands. The Best Illinois Bright Start College Savings Program To build the best and worst lists, Morningstar analysts focus on diversification, fees, flexibility, and the underlying funds. We like to see plans that aren’t heavily reliant on any one area of the market, because that can mean a more volatile ride and lower returns than what investors face at better-diversified 529 programs. Costs are key because they come directly out of investors’ returns, meaning the higher the price tag, the lower the returns. (Also, Morningstar research has shown that costs are the best predictors of mutual funds’ long-term performance; low costs are essential for the success of 529 plans.) And because so many plans rely on similarly constructed index funds, it’s safe to say the lowest-priced ones will likely earn the best returns. Meanwhile, flexibility matters, because when it comes to asset allocation, there generally isn’t a one-size-fits-all solution. Investors are approaching college with different amounts of principal, different risk tolerances, and different time horizons, so we typically look favorably on plans that allow investors to make adjustments to their exposure, be it through individual funds or static portfolios with a fixed mix of Illinois is a Cinderella story. Previously lackluster with middling investment options, the plan switched its program manager to OppenheimerFunds. It now offers a choice between sensibly constructed all-index and actively managed age-based options with underlying funds from Vanguard and Oppenheimer, respectively, as well as rock-bottom expenses. The plan’s index option makes it a close substitute for the laudable Utah Educational Savings Plan, a former member of the best list (and still 38 Morningstar Advisor Summer 2008

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Morningstar Advisor - Summer 2008 Contents Letter from the Editor Contributors Inbox College Planning: Solutions and Concerns ETFs: The Next Chapter Engineering Financial Advice Investment Briefs Flexible vs. Style-Pure Managers: The Evidence Forging a New Commodity Index Work Your Way Through College Planning Sizing Up the Options Best and Worst 529 College-Savings Plans A 529 Travel Guide 10 Tax-Smart Tips for College-Savings Planning Global Dialogue How Sequoia Cranks Out Good Returns Year After Year The Many Layers of David Winters Living on the Edge Stocks to Buy Once a Decade With Munis Feeling the Pain, Some Opportunities Arise Health Care Provides Shelter from Economic Storm Help Your Clients Get More Out of Their Bond Portfolios Mutual Fund Analyst Picks 50 Most Popular Equity ETFs Undervalued Stocks Most Popular Variable Annuities New at Morningstar New on MorningstarAdvisor.com Closer to Fine

Morningstar Advisor - Summer 2008

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