Morningstar Identifies Best Practices of 529 College-Savings Plans in Annual Study

May 27, 2015, 13:09 ET from Morningstar, Inc.

CHICAGO, May 27, 2015 /PRNewswire/ -- Morningstar, Inc., a leading provider of independent investment research (NASDAQ: MORN), today published its annual study of 85 U.S. 529 college-savings plans, which had nearly $218 billion in total assets under management as of Dec. 31, 2014. In the report, Morningstar's manager research analysts highlight 529 industry best practices, evaluate the tax benefits of using 529 plans for college savings, and review the size and growth of the 529 industry. The study is a companion piece to the Morningstar Analyst Ratings for 529 College-Savings Plans, typically issued in October.

Morningstar analysts assess the 66 plans that they have assigned a Morningstar Analyst RatingTM to identify best practices within the industry. The Morningstar Analyst Rating for 529 plans, expressed as Gold, Silver, Bronze, Neutral, or Negative, is a forward-looking, qualitative rating that represents Morningstar's conviction in the plans' abilities to outperform their relevant benchmark and peer groups on a risk-adjusted basis over the long term. In the study, Morningstar analysts outline the five key pillars they evaluate to arrive at a rating—People, Process, Parent, Performance, and Price—and provide examples of best practices for each pillar. The report also quantifies the federal tax benefits of 529 plans by comparing back-tested, after-tax results of various 529 portfolios with similarly managed open-end mutual funds.

"As assets in college-savings plans continue to grow, we're focused on helping college savers select the best program to meet their goals," Leo Acheson, a Morningstar analyst and the study's lead author, said. "Our research aims to differentiate between plans and shows the strongest 529 programs feature asset managers that follow prudent processes, offer high-quality investment options, and benefit from strong oversight and attractive fees."

The study identifies the following best practices:

  • Process: Hiring experienced asset allocators with strong records of diversifying 529 portfolio investments over time or familiarity running similar investments. For example, New York's 529 Advisor-Guided Program hired the JPMorgan SmartRetirement Target-Date Series team in 2012 to manage its age-based portfolios. The target-date series' management team won Morningstar's 2014 Allocation Fund Manager of the Year award.
  • People: Incorporating underlying investments that are Morningstar Medalists, which are funds with a Morningstar Analyst Rating of Gold, Silver, or Bronze, or using strategies from asset managers with Positive Parent pillar ratings, which indicate a demonstrated record of putting investors first. Firms with a Positive Parent pillar rating manage more than two thirds of 529 portfolio assets.
  • Parent: States and program managers exhibiting prudent care of capital in overseeing the plans. Ohio, Utah, and Massachusetts stand out for housing 529 plans under entities that are relatively free of political influence and for staffing the plans with employees whose sole or primary responsibilities are administering the plan. Meanwhile, plan providers such as Vanguard, American Funds, and T. Rowe Price have earned an "A" Morningstar Stewardship GradeSM, which is designed to help identify fund companies that align their interests with fund shareholders.
  • Price: Levying low expense ratios that are comparable to similar open-end mutual funds and reducing program management fees as assets increase. For example, the Minnesota College Savings plan lowered fees by more than 20 basis points in 2014 in response to asset growth.
  • Performance: Populating plans with Morningstar Medalists and low-cost funds, which Morningstar research shows are more likely to outperform over the long term. For example, Virginia's CollegeAmerica plan has demonstrated strong past performance, earning the highest average overall Morningstar RatingTM among advisor-sold peers. Morningstar analysts believe the Virginia CollegeAmerica plan will likely outpace competitors because of its attractive investment lineup, which currently features 18 Morningstar Medalists.

Other findings of the annual study include:

  • While the federal tax benefits of 529 plan portfolios make them a superior investment vehicle for college savings, comparable open-end mutual funds cost 18 basis points less, on average. In the study, however, Morningstar analysts found that 529 plans had higher average after-tax total returns than open-end funds in every category.
  • College-savings plans continue to grow, but more slowly than before. Assets rose 9 percent to $218 billion as of Dec. 31, 2014, compared with $200 billion as of Dec. 31, 2013, as a result of net inflows and market appreciation. Direct-sold plans grew at a faster pace than advisor-sold plans and now hold 52 percent market share.
  • States with 529 plans administered by some of the nation's largest asset managers hold the greatest share of 529 assets, highlighting the importance of brand names and sales reach in the 529 industry. Virginia's CollegeAmerica plan, nationally sold through American Funds, remains the largest 529 program, accounting for approximately 23 percent of 529 portfolio assets, followed by the New York plan, with 9.1 percent, Nevada with 6.8 percent, and New Hampshire with 6.2 percent, which are also administered by large asset managers.

Morningstar's 529 plan landscape study is available here. Additional information and state-by-state comparisons can be found in the 529 Plan Center at An article summarizing the study's findings is available at

Morningstar's 529 plan research and data also is available through Morningstar® Advisor WorkstationSM and Morningstar OfficeSM, its software platforms for financial advisors; and Morningstar DirectSM, its global investment analysis platform for institutional investors.

Morningstar has approximately 100 manager research analysts worldwide who cover approximately 4,100 funds. The company provides data on approximately 186,500 open-end mutual funds, 9,800 closed-end funds, 11,300 exchange-traded product listings, and 4,500 state-sponsored college savings plan portfolios, as of March 31, 2015.

About Morningstar, Inc. Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offers an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors. Morningstar provides data on approximately 500,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 15 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had more than $179 billion in assets under advisement and management as of March 31, 2015. The company has operations in 27 countries.

Analyst Ratings are subjective in nature and should not be used as the sole basis for investment decisions. Analyst Ratings are based on Morningstar analysts' current expectations about future events and therefore involve unknown risks and uncertainties that may cause Morningstar's expectations not to occur or to differ significantly from what was expected. Morningstar does not represent its Analyst Ratings to be guarantees nor should they be viewed as an assessment of a fund's or the fund's underlying securities' creditworthiness. This press release is for informational purposes only; any mention of a specific 529 college-savings plan should not be considered a solicitation by Morningstar.

©2015 Morningstar, Inc.  All rights reserved.


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