State's college savings plan 'below average'

Parents who are saving for college in the Minnesota state college plan would be better off saving elsewhere. That's the finding from a Morningstar report that rates Minnesota's 529 plan "below average," a downgrade from the "average" it received in last year's inaugural report.

Garrison Keiller would be disappointed.

"This plan is an average plan at heart. It's just that in-state residents don't have a reason to stay with this plan because there are no tax incentives anymore," explained Morningstar mutual fund analyst Christina West.

She is referring to the elimination of a matching grant program for lower-income Minnesotans who scrape to save for college. The grant, which was a paltry incentive compared with tax breaks offered by some other states, was a casualty of Minnesota's budget agreement this summer. Without the tax break, Minnesota is one of about a dozen states that provide no financial incentives for residents to save for college through their home state's plan.

Jack Rayburn, manager of the MN College Savings Plan, said he was "a bit surprised" and concerned by the findings and is taking the Morningstar report "under advisement." Rayburn said he believes Minnesota is the only state that has ever eliminated an incentive to save.

While 529 plans are state-sponsored, families can invest in any state's 529 plan no matter where they live or plan to send their kids to school. So why wouldn't a Minnesotan check out a top-rated 529 such as Nevada's four-star-rated Vanguard 529 College Savings Plan, which has an average total expense ratio of 0.30 percent instead of Minnesota's not-quite-three-star-rated plan with a 0.45 percent expense-ratio?

TIAA-CREF, the investment company that manages Minnesota's 529 plan, also manages a handful of other 529 plans in states such as Georgia and Michigan, which have lower fees.

But at a time when college costs and financing are the talk of the nation, I would think Minnesotans currently using the Minnesota plan might strongly consider pulling out of the plan.

The problem, however, is that a top-rated, low-fee plan today may be in the middle of the pack tomorrow. "It's sort of a moving target," said Joseph Hurley, founder of savingforcollege.com. That's because the industry feels competitive pressure to lower costs, so plans are renegotiating fees all of the time.

In his site's comparison, Minnesota gets 3.5 out of five graduation caps. "Performance certainly hasn't been terrible," Hurley said. Over the past year, Minnesota's overall plan performance is slightly above average compared with other 529 plans that aren't sold through a financial adviser. Looking at three- and five-year returns, performance is about average.

Investments in college savings plans range from options that shift their mix from mostly stocks to mostly bonds as your child nears college age to a guaranteed option that promises a certain return.

Overall, Morningstar said conservative options are seeing the most cash from investors, which isn't surprising considering the stock market's topsy-turvy performance.