ByKELLI B. GRANT
MOST PARENTS KNOW
that one of the smartest ways to save for college is through a tax-advantaged
529 college savings plans. But with more than 80 plans to choose from, how do you know which one is right for you?
Just this week, Morningstar came out with their latest picks, based on the performance of the plan's underlying investments and fees, among other criteria. Of the top five, two are broker-sold plans and three are direct-sold plans. Morningstar included both to provide options for consumers who prefer to work with their financial advisor to select a plan. (If you buy through a broker, you'll be stuck paying a "load," or sales charge; we generally think that most folks are better off skipping this added fee.)
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But unless you live in Colorado, Maryland, Nebraska, Utah or Virginia the states from which these winning plans hail don't rush out to sign up just yet, says Kerry O'Boyle, the Morningstar analyst who compiled the report. "Investors really ought to look at their home state's plan first," he says. If your state offers a decent tax deduction on your contributions to your home state's plan, that may give it a competitive edge.
But if your state's plan stinks (or if you live in a state with no state-income tax or one that will give you the tax break even if you invest in a plan outside of your home state), these five plans are worth a look.
| 1. Colorado Scholars Choice | |
| Plan details: A broker-sold plan, Scholars Choice is managed by ClearBridge Advisors LLC, an affiliate of Legg Mason. Choose one of seven portfolios based on when your child will enroll in college, or one of six blended portfolios that hold a static mix of stocks, bonds and cash. You'll need a minimum contribution of $250; $50 for each additional contribution. Colorado residents can deduct their annual contributions in full from their state taxes.Annual Fees: Investors pay a front-end load of 3.5%. You'll pay a management fee to plan administrators of 0.10% to 1.09%. Portfolio expense ratios for the funds themselves range from 0.49% to 0.91. The maintenance fee of $20 is waived for Colorado and Wyoming residents and for investors with a balance of more than $2,500.Why it's worth a look: Since Legg Mason took over the plan from Citigroup Global Markets in 2006, it has incorporated its own funds, and those of subsidiaries. The result of the new leadership, says O'Boyle, is a better suite of age-based portfolios. The one downside: Front-load fees. Still, "relative to other broker-sold plans, the fees are moderate," he says. |
| 2. Maryland College Investment Plan | |
| Plan details: T. Rowe Price manages the direct-sold Maryland College Investment Plan, which offers investors a choice of eight portfolios based on when your child will enroll in college, and five blended portfolios. To invest, you'll need an initial contribution of at least $250, or just $25 if you set up automatic monthly contributions. Maryland residents can deduct up to $2,500 in contributions annually from their state taxes.Annual Fees: Investors pay a management fee of 0.28%. Portfolio expense ratios range from 0.41% to 0.71%. The maintenance fee of $25 is waived if you make direct payroll contributions, or have a balance of more than $25,000.Why it's worth a look: It's a low-cost plan with sound investment choices, says O'Boyle. T. Rowe Price slashed the fees for Maryland College Investment Plan in July 2006, eliminating a $75 enrollment fee and cutting the annual fee from $30 to $25. It also enabled consumers to waive that fee. |
| 3. Nebraska College Savings Plan | |
| Plan details: Union Bank & Trust's College Savings Plan of Nebraska, a direct-sold plan, offers investors a choice of four portfolios based on when your child will enroll in college and six blended portfolios. You can also choose from 21 individual fund portfolios, ranging from Fidelity Diversified International to Vanguard Total Bond Market Index. There is no initial contribution minimum. Nebraska residents can deduct up to $1,000 in contributions annually from their state taxes.Annual Fees: Investors pay a management fee of 0.6%. Portfolio expense ratios range from 0.05% to 1.04%. There is a maintenance fee of $20.Why it's worth a look: Unlike other fund managers, Union Bank & Trust has no funds of its own. That's a definite plus, says O'Boyle, because the offerings are diversified across fund families. "The plan just has incredible flexibility," he says. "Most investors would be able to find something that fits their risk tolerance." |
| 4. Utah Educational Savings | |
| Plan details: Utah uses Vanguard funds for its direct-sold Educational Savings Plan Trust, offering investors a choice of five portfolios based on when your child will enroll in college, and four blended portfolios. There is no initial contribution minimum. Utah residents can deduct up to $1,560 ($3,120 if filing jointly) in annual contributions from their state taxes for each beneficiary.Annual Fees: Investors pay a management fee of 0.25%. Portfolio expense ratios range from 0.03% to 0.14%. Nonresidents pay a maintenance fee of $5 per $1,000 invested, up to a maximum $25.Why it's worth a look: "They've been on this list from the beginning," says O'Boyle, noting that the plan has earned a top spot since Morningstar began evaluating 529 plans in 2004, thanks to its winning combination of low cost and good investment choices. The state of Utah administrates the plan itself, which keeps those fees extremely low. |
| 5. Virginia CollegeAmerica | |
| Plan details: American Funds manages the Virginia CollegeAmerica Savings Plan, and offers 22 individual funds from Small Cap World Fund to American Balanced Fund from which to build a portfolio. To invest, you'll need an initial contribution of at least $250. Virginia residents can deduct up to $2,000 in annual contributions from their state taxes for each account.Annual Fees: Investors pay a front-end load of up to 5.75%, which reduces as your assets increase. There is no management fee. Portfolio expense ratios range from 0.42% to 1.9%. There is a $10 maintenance fee. You'll also pay a one-time $10 enrollment fee.Why it's worth a look: American Funds has built up a reputation as the best broker-sold fund provider, says O'Boyle. With one of the most flexible plans around, it's a good option for someone working with a financial advisor. Although its front-end load fees are substantial, the plan makes up for it and beats out other broker-sold plans by keeping expense ratios relatively low. |
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