Fees, investment options sink four college savings plans in Morningstar rankings

Overall, firm finds fees coming down and investment choices improving

Oct 16, 2012 @ 11:30 am

By Liz Skinner

529 plans, Morningstar
+ Zoom

High fees and subpar options led Morningstar Inc. to give college savings plans from Kansas, Minnesota and Rhode Island negative ratings in its annual audit.

The four plans that Morningstar gave a negative rating to are Kansas' Schwab 529 College Savings Plan, Minnesota's College Savings Plan, and both the adviser-sold and direct-sold Rhode Island CollegeBoundfund plans.

“The negative plans have something that will prevent those plans from delivering a good shareholder experience,” said Laura Lutton, Morningstar's fund-of-funds research director.

The concern is high costs for two of the plans: Kansas' Section 529 program, managed by American Century Investment Management Inc., and Minnesota's plan, managed by TIAA-CREF Tuition Financing Inc. The Rhode Island plans, managed by AllianceBernstein LP, were dinged because of their investment options, Ms. Lutton said.

Stacey Belford, vice president of 529 sales at American Century, said the expenses of the underlying fund in the Kansas plan are greater because it's an actively managed fund with investments from multiple managers, including Schwab, American Century, Pimco and Metropolitan West.

In addition, most investors in the plan come through Charles Schwab advisers, so even though it's a direct-sold plan, “it really is more similar to an adviser-sold plan that doesn't have a load on it.”

The investment research firm also identified four gold-rated plans, four silver-rated, 19 bronze-rated and 33 neutral programs.

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Ms. Lutton said overall, the industry has continued to decrease expenses and offer more and better investment choices, including an increase in exchange-traded funds.

“Over the past 12 months, we continued to see 529 plans push for lower fees and higher-quality investment options, and both of these trends directly benefit college savers,” she said.

This is the first year that Morningstar has ranked 529 plans using this scale, which the company uses for mutual funds, and plans to put in place for all the investment products it rates. Last year, no plans received Morningstar's lowest rating.

Morningstar reviewed 64 of the nation's largest 529 college savings plans, representing 95% of the $162 billion that has been saved in these plans. Funds from these accounts grow and can be used without owing taxes as long as they are used for college expenses such as tuition, fees, books, etc.

TIAA-CREF and AllianceBernstein did not return a call seeking comment.

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