State 529 college savings plans are cutting fees, new analysis finds

Just a small proportion of parents of children heading to college are putting money aside in state 529 savings plans, though a new analysis finds that many of the plans have been making themselves more attractive by reducing fees.

In its annual rating of the plans, the investment research company Morningstar noted that the industry had been making significant fee cuts, so plans become less competitive if they don't follow suit.

The company analyzed 62 plans, comprising the bulk of money held in 529 accounts, and rated 31 as the best based on factors like fees, choice of investments and strong professional oversight. Access to the results requires a Morningstar membership.

The accounts, which are authorized by Section 529 of the Internal Revenue Code, are offered through state-sponsored programs to help people invest for higher education. Money withdrawn from 529 plans is tax-free as long as it is spent on tuition, fees and other eligible costs.

Beginning this year, up to $10,000 a year from a 529 fund can be used to pay for private school from elementary school onward.

All states but Wyoming offer some type of 529 plan, according to the College Savings Plans Network, an information clearinghouse. As of midyear, the network reported, there were about 14 million 529 accounts with a total of about $329 billion in savings. The average balance was $24,000.

Many families don't use 529 accounts, perhaps because of the plethora of competing plans, said Steve Wendel, Morningstar's head of behavioral science. He estimated that just 16 percent of parents of college-bound children were saving in a 529.

Twenty-seven plans rated either silver or bronze, suggesting they have desirable features but also some room for improvement.

Twenty-six plans earned "neutral" ratings. Five plans — Arkansas' GIFT College Investing Plan, the Florida 529 Savings Plan, Nebraska's TD Ameritrade 529 College Savings, New Jersey's Franklin Templeton 529 College Savings and North Dakota's College SAVE — received negative ratings because they lack compelling features and have at least one flaw, like high fees, that make them poor choices. Four were downgraded from neutral last year.

Participants who invest in plans with negative ratings, Morningstar said, should consider moving their money to a higher-rated plan.

Two plans received upgrades from last year's ratings. The Oregon College Savings plan was bumped to bronze from neutral after hiring a new program manager, overhauling its investment lineup and tweaking the "glide path" — the shift of stock investments to bonds as college approaches — for its age-based portfolios. Arizona's Ivy InvestEd 529 plan moved to neutral from negative after lowering its fees and smoothing out its glide paths.

Morningstar's ratings include plans that investors can open on their own through the state program and plans sold only through investment advisers, which may offer more investment options but often carry extra costs.