Top-rated 529 college savings plans probably are not for you

Judging by the latest performance rankings, two 529 college savings plans in particular look enticing. Too bad that most Americans are not allowed to invest in either one. That is just one of the drawbacks of trying to choose a college savings plan by performance alone.

529 plans are sponsored by states and run by investment management companies. Withdrawals from the accounts can be used tax-free to pay for qualified education expenses at any college or university in the country, such as tuition, fees and books.

SavingForCollege.com, a plan comparison website that publishes rankings each quarter, said the District of Columbia's direct-sold DC 529 College Savings Program topped the lists for one-, three- and five-year performance as of March 31.

Louisiana's START Savings Program ranked first for 10-year performance

Those two plans, however, are among the few that restrict participation to state residents only. An adviser-sold version of D.C.'s plan was not included in the rankings, which were limited to plans available for direct purchase by investors.

Plan shoppers still have plenty of good choices, though, since most 529s welcome out-of-state contributors and 17 other plans made SavingForCollege.com's performance rankings.

Alaska, Florida, Maine and Michigan ranked in the top 10 for three of the four ranking periods, while New York makes the top 10 in all four periods.

"It's so difficult to do an apples-to-apples comparison," Hurley said. "Some have 10 options, some have 25."

Most 529 plans have age-weighted options that grow more conservative as the beneficiary nears college age, although those "glide paths" vary considerably. The plans typically offer a wealth of other investment choices for those who want to construct and manage their own portfolios.

SavingForCollege.com compares the published performance of seven portfolios from each plan and creates a composite of those results. The portfolios represent asset weightings of 100 percent stock, 80 percent stock, 60 percent stock, 40 percent stock, 20 percent stock, 100 percent fixed-income and 100 percent short-term investments.

But families should consider more than just performance rankings when picking a 529 plan.

Most states, for example, offer tax breaks and other incentives to their residents for sticking with the in-state plan, Hurley said. Investors may prefer a passive investing approach over active, or vice versa, and may also feel more comfortable with investment managers they know well.

Morningstar Inc., a research firm that compiles annual rankings of 529 plans, includes performance as a factor but also considers plan costs, oversight and management, among other factors, said Leo Acheson, an analyst for fund strategies at Morningstar.

Its rankings try to predict which plans will continue to outperform their peers on a risk-adjusted basis, he said.

The bottom line is that investors have a great deal to consider besides performance, said Andrea Feir­stein, managing director of New York-based AKF Consulting Group, which advises 33 state plans.

"It should never drive the final investment decision," she said.