529 Plan Performance Varies Widely

But on the college-savings front, it easily stands out. With more than $7.6 billion in assets as of year-end 2006, Rhode Island's 529 Savings Plan — the CollegeBoundfund managed by AllianceBernstein — is the second-largest 529 plan in the country, claiming nearly $1 of every $10 saved up so far in these increasingly popular college planning vehicles. Each day last year, an average of 33 out-of-state investors chose to forego the potential tax breaks offered by their home state and open an account with this tiny state's big plan. (For a quick tutorial on the basics of 529 Savings Plans, click here.)

To be sure, that's likely a result of the sales efforts of investment advisors nationwide: outside of Rhode Island, the only way to invest in the plan is through an advisor. But despite the sales commissions — up to 4.25% upfront or a maximum 4% on the back end, depending on the share class — the plan has yet to disappoint. Even factoring in the maximum sales load paid by investors, it beat all other advisor-sold and many direct-sold 529 plans over the past three years, according to the latest performance rankings by Savingforcollege.com, an online resource run by 529 plan expert Joe Hurley. (It also came out ahead in five-year rankings, but many states' plans don't have long enough histories to make a fair comparison.)

So is it worth it to pay a load — something we rarely, if ever, recommend — just to get into what looks like the best 529 plan out there? The answer may be "yes" for some investors. But keep in mind: most direct-sold funds still tend to outperform advisor-sold funds, once commissions come into the mix. You need to do your homework to find out if a load makes sense for you.

Choosing a 529 plan is a complicated affair and professional advice comes in handy. (Nearly 80% of 529 plan sales are conducted through an advisor, according to the Financial Research Corporation, an industry research group.) And while many states offer tax benefits to their residents if they invest in their home state's plan, making it a good place to start, 529 plans still differ substantially in terms of costs, underlying investment options and, ultimately, returns.

In some cases, the lag on average returns has been large enough to make that load appear worthwhile. Take one of Arizona's 529 programs: the direct-sold Family College Savings Program managed by Securities Management & Research (SM&R) returned an average 8.28% on its 100% equity portfolio over the last three years ending September 30, according to Savingforcollege.com. At the same time, AllianceBernstein's advisor-sold 100% equity portfolios averaged almost double returns, 15.06% annually, after factoring in the maximum sales load. (SM&R's contract with the state expired in November 2006 and was not renewed.)

But judging a plan by its returns alone is a mistake, warns Kerry O'Boyle, an analyst at investment research firm Morningstar. "It's dangerous to look at performance when you don't know what's in the portfolio that's driving that performance," he says. And here's the key: what's in one state's 529 program can be entirely different from another's. "It does amaze me sometimes how different they can be in terms of asset allocation, diversification, and the underlying investment options that they use," O'Boyle says.

Here's what to look for when choosing a 529 savings plan.

But just how aggressive to start out and how soon to shift to more conservative gear differs widely among plans, says Robert Shipley, CEO of 529 Plan Solutions, an industry research firm. "Some plans start 100% in equities, others start with 80%, or even 60% for a newborn," he says.

Which one should you choose? Depends on whom you ask.

Thomas Fontaine, a senior portfolio manager at AllianceBernstein, upholds the same investment principles to college savings as with retirement: if you're investing for a newborn, you should take a strong equity position because your investment horizon is long enough to make up for any short term market losses. Its aggressive portfolio starts out an infant with 100% stocks and gradually shifts to an allocation of 40% stocks, 55% bonds and 5% cash.