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Deal of the Day by Kelli B. Grant (Author Archive)
Morningstar Picks Five Best 529 Plans
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 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. |
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Before people start hamering Morningstar on load vs. no-load, keep this in mind. A 5.25 commission and low fees can be significantly cheaper than a no-load w higher fees. Next time you refinance your home, see the difference between higher interest rates and lower mortgage rates. Now examine the consistency of the portfolio in good and bad markets.Then you can sort out the winners and loosers.
I'm with BigWednsdy. My state's plan (WV) has no loads and a reasonable variety of investments - but was beat out by funds that start you off at a disadvantage. In my mind, this article casts severe doubt on Morningstar's ranking ability.
BigWednsdy and all, the point I got from the information contained in each plan's summary information is the fact that over time, the fees are low to reasonable. For me, I have many years before my children go to college and I want the plan that will give me the most by the time they go to school. If that means paying 5.25% up front with low fees moving forward AND I end up with more money than the folks paying low to no up front fees, then I was successful.
Once again, Morningstar shows no spine. Two of the top five have up front loads and fees that make it extremely hard to perfom well. But Morningstar caters to reps and their industry, thus the conflict-of-interest reccomendations.
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I completely agree with BigWednsdy...are you kidding...loaded funds? The article says, yes but it's good compared to other broker sold plans...but why buy a broker sold plan when there are so many excellent plans out there that are state sponsored and offer much lower fees and no loads. I'm really disapponted that Morningstar and Smart Money would offer up such poor advice.