Morningstar announced the rating of 54 of the nation’s largest 529 college-savings plans on Thursday.
The company has rated the largest and most prominent 529 college-saving plans since 2012. This year, Morningstar rated 54 plans, representing 90 percent of the industry’s $415 billion in 529 plan assets.
The majority of those rated fell in Morningstar’s recommended categories of gold, silver, and bronze.
Each plan was evaluated based on its asset allocation approach, its process for selecting investments, the strength of the investment team, the level of involvement of the parent state, and its fee structure.
The more robust the process, the more stable and engaged the parent state was, and the lower the fees, the higher each plan was rated, said Morningstar.
All told, Morningstar analysts assigned 15 Silver ratings, 17 Bronze ratings, 16 Neutral ratings, and four Negative ratings to the 54 evaluated 529 plans.
Only two plans, Utah’s my529 plan —which has made gold every year since 2012— and the Pennsylvania 529 Investment Plan, were rated gold this year.
The Michigan Education Savings Program fell from its previous position of gold to silver. Alaska, Delaware, Georgia, and New York were some of the other states with plans that were rated silver.
However, Hyunmin Kim, manager research analyst at Morningstar, said that any plan that falls within the gold, silver, or bronze rating is one that Morningstar thinks has an expected above-industry average long-term return.
“Gold-rated plans are what we think of as the two of the best offerings within the industry. They stand out in all four pillars. They have really solid investment managers, a really robust investment management process, as well as cheap fees and solid oversight from the state. They excel on all fronts,” said Kim.
Ten plans this year were upgraded from previous years ratings and seven plans were downgraded, according to Morningstar.
Kim said these rating changes highlight the overall positive trend 529 plans have taken in recent years.
“Asset managers no longer consider education savings plans as an afterthought to their existing multi-asset offerings; instead, we see increasing dedication of research and resources to specifically helping education savers. Stewardship standards continue to rise as well,” wrote Morningstar in the report.
In addition, Kim said the industry has made commendable strides in lowering fees and creating a more diversified and robust portfolio which in turn have raised the bar for each rating tier.
In addition to the ability for Americans to save for college in tax-advantaged accounts, soon 529 plans will be able to help people save towards retirement.
Currently, money invested in a 529 college-saving plan may only be used for qualified education expenses. Any non-qualified withdrawal of the money could result in additional income taxes as well as a penalty fee.
However, last year, Congress passed the Secure Act 2.0 in order to strengthen American’s financial readiness for retirement. Starting in 2024, as part of the new legislation, any unused 529 funds can be rolled over into a Roth IRA retirement plan for the same beneficiary tax and penalty-free.
