Fees, investment options sink four 529 plans in rankings

Oct 21, 2012 @ 12:01 am

By Liz Skinner

High fees and subpar options led Morningstar Inc. to give Section 529 college savings plans from Kansas, Minnesota and Rhode Island negative ratings in its annual audit.

The four plans 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 — 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, she said.

UNDERLYING EXPENSES

The expenses of the underlying fund in the Kansas plan are greater because it is an actively managed fund with investments from multiple managers, said Stacey Belford, vice president of 529 sales at American Century.

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

Morningstar also identified four gold-rated plans, four silver-rated, 19 bronze-rated and 33 neutral plans.

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

“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 it 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 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 and books.

AllianceBernstein and TIAA-CREF didn't return calls seeking comment.

lskinner@investmentnews.com Twitter: @skinnerliz

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