Morningstar Advisor - June/July 2011 - (Page 7)

Letter From the Editor 529 Plans Mature You’ll read in this issue’s Spotlight section (Page 36) that 529 plans are becoming tough to beat as college-savings vehicles for most investors. States are lowering fees, hiring better investment managers, and ditching underperforming investment options— not to mention all the tax advantages the plans offer. As Morningstar analyst Laura Pavlenko Lutton says, “529 plans are growing up quickly.” But for all its improvements, the industry still faces some questions. A big one is whether investors will save and earn enough in the vehicles to be able to fund a college education. According to an estimate in 2009 by the Investment Company Institute, the average 529 account balance is only $9,700—enough to cover about one year of in-state tuition at a public university. From low initial-investment thresholds to the 2008 market crash, there are all sorts of explanations for this figure. But in the end, if the states and 529-plan asset managers can’t do more to entice college savers to put more assets into 529 plans, the industry will have failed. In a time when college costs have skyrocketed, plan managers and consultants tell us that the typical college saver delays opening a 529 account until their children are between the ages of 7 and 10, squandering half of child’s precollege time horizon. Advisors tell us that clients find 529 plans confusing and hard to research—impediments that make it more difficult for investors to set up accounts. So even though the industry has come a long way in its short 15-year existence, it still must continue to get better. In the meantime, Morningstar has stepped up to make the process easier for the investors. A team of analysts, led by Lutton, completely revamped Morningstar’s coverage of 529 plans late last year—all in the name of giving advisors and investors the ability to cut through unclear, inconsistent information to find the most suitable and best plans available. The team collected new data at both the plan level and on individual portfolios, wrote new research, created new investment categories, and unveiled new analyst ratings on more than 50 plans. Today, college savers can search for 529 plans much in the same way that they screen for mutual funds and get results with the same type of impartial, accurate information. For our Spotlight, we asked the team to detail their work and share what they learned about the 529 marketplace. Analyst Josh Charlson starts the section off with several important observations that highlight the difficulties of investing in 529s. For one, the glide paths of age-based options vary greatly from plan to plan. And Charlson says that in reaction to the 2008 meltdown many plans have become too conservative for the short timeframe investors have before their kids go to college. Lutton writes about how the role of the states influences the quality of 529 plans. It’s an added risk to 529 investing. Analyst Christina West then dives into the new 529 data and shows advisors how to use it to find suitable plans for clients. We also have a two-page chart listing data on 82 plans and the new analyst ratings on the 54 plans Morningstar covers. The work these analysts accomplished is a big step forward for advisors and investors who want reliable, clean data to be able to research and compare 529 plans across states. After Morningstar’s effort, the ball is in the industry’s court. It must make it easier and more rewarding for parents and grandparents to use 529 plans to save for college. Otherwise, the industry’s coming of age will be stunted. Jerry Kerns 7

Table of Contents for the Digital Edition of Morningstar Advisor - June/July 2011

Morningstar Advisor - June/July 2011
Letter From the Editor
Questions for the Secret Society
Are 529 Plans a Useful Tool for Clients’ College-Savings Goals?
Taking the Lead
How to Sell Covered Calls
The College-Savings Challenge
Time to Play Defense?
Four Picks for the Present
Investment Briefs
Careful What You Wish For
Caution in Utilities After Japan Crisis
Blossoms and Thorns in the 529 Garden
Lower Fees, Competitive Returns Help More 529s Make the Grade
Morningstar Grades 529 Plans
529 Risks Include the Political
Researching 529 Plans Made Easy
How Closed-End Funds Are Born
Boutique Within a Bank
The Inefficient Pricing of Moats
More Steak Than Sizzle
Mutual Fund Analyst Picks
50 Most Popular ETFs
Undervalued Stocks With Wide Moats
The Dangers of Demonizing

Morningstar Advisor - June/July 2011