Morningstar to rate Section 529 plans

May 17, 2010 @ 3:59 pm

By Jessica Marquez

Morningstar Inc. this fall for the first time will publish ratings for all of the college savings plans in the 529 market.

Up ’til now, Morningstar has released an annual list of the best and worst 529 plans but wanted to expand its research to address the entire market, said Laura Lutton, a Morningstar analyst who is working on the ratings.

“If a fund wasn’t on the best or worst list, no one would know where that fund stood,” Ms. Lutton said. “Comparing the performance of these plans has been very difficult for customers and for the states.”

The firm will base its comparisons on performance and fees. It will also consider how the states negotiate fees with the 529 plan providers and how those fees are passed on to investors.

Some experts, however, worry that Morningstar will have a difficult time comparing these plans. “I think it’s a great addition, if they will take the time to really understand why the states make the decisions they do, and fundamentally what the states’ role is within the whole program,” said Andrea Feirstein, the managing member of AKF Consulting Group. “These are not mutual funds and you cannot compare 529 plans to mutual funds.”

The challenge in creating ratings is that the plans differ with regard to fees, performance, portfolio construction and tax treatment, said Peter Mazareas, chairman of the College Savings Foundation.

“It’s very difficult to standardize 529 plans simply because they are so different in terms of asset allocation and in terms of the rules and regulations and so many features are different from plan to plan,” he said.

Ms. Lutton, who said Morningstar will base its comparisons on performance and fees, acknowledged that college savings plans are different than mutual funds, but added they do share some ground.

“These investments are competing with the same shareholder dollars as mutual funds,” Ms. Lutton said. “So I think a 529 vehicle has to demonstrate that it’s a viable alternative to a taxable account.”

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