College savings plans are better deals than they were a few years ago, but there are still a few clunkers out there. If you're invested in one, now may be the time to think about making a change.
Each fall, investment research firm Morningstar singles out the nation's best 529 college savings plans. That gives you a chance to compare the plan you're using to a gold standard. If the gap is wide, and tax considerations or other benefits don't compel you to stay, shifting to another state's plan could give you better returns, lower costs or both.
For the uninitiated: 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. In addition, many states offer tax breaks for their residents and a few offer matching funds.
The plans are extremely diverse in their investment options, management strategies and fees, but overall have improved significantly, said Laura Lutton, Morningstar's 529 expert and director of its funds research.
"The days of plans being filled with really gross investment choices are behind us," Lutton said.
Still, some plans stand out as superior, Lutton said. Morningstar named as the country's best plans the T. Rowe Price College Savings Plan in Alaska, the Maryland College Investment Plan, the Vanguard 529 College Savings Plan in Nevada and the Utah Educational Savings Plan. The plans benefit from solid management, good investment options and reasonable fees, said Morningstar, which gave them a "gold" rating.
The next-best plans, winning a "silver" rating, were the iShares 529 Plan in Arkansas, Scholarshare College Savings Plan in California, Michigan Education Savings Program, CollegeAdvantage 529 Savings Plan in Ohio and Virginia's CollegeAmerica.
Twenty-three plans received a "bronze" rating and 28 were rated "neutral." Morningstar said the bronze plans "have well-executed strategies at a fair price" and that what separated bronze from neutral plans was often the state's tax benefits, with better benefits meriting the higher status.
The four plans cited as the worst include the Schwab 529 College Savings Plan in Kansas, the Minnesota College Savings Plan and two Rhode Island plans, CollegeBoundfund and CollegeBoundfund Direct. Rhode Island's investment options suffered from poor performance while the plans in Kansas and Minnesota were hampered by high fees, Morningstar said.
The federal law that governs 529 plans allows account owners to switch plans once every 12 months. Investors can get around that limit by changing beneficiaries, or the person whom the account is supposed to benefit, said 529 expert Joe Hurley, who founded the SavingForCollege.com site. The beneficiary can be changed back to the original person after 12 months.
Sometimes tax breaks and matching grants can make staying in a less-than-optimal 529 plan worthwhile. That's not the case with Minnesota, which offers neither benefit. Kansas, however, offers matches to low-income families. The state also gives residents a tax deduction — up to $3,000 per beneficiary for singles and $6,000 for couples — but they can get the write-off for investing in any state's plan.
Rhode Island's tax deduction, meanwhile, is limited to $500 for individuals and $1,000 for married couples. Rhode Island has a one-time "baby grant" of $100 for families who open 529 accounts in the state and a matching grant program for low- and moderate-income families that was closed this year to new applicants.
Investors who don't want to lose such benefits could consider making the best of what their plan offers, Lutton said. The Rhode Island plan, for example, suffered in the Morningstar ratings because the age-based investments run by AllianceBernstein lagged in performance. But the plan also offers low-cost Vanguard options for investors willing to do their own asset allocation, Lutton said.
Another option is to take advantage of the best your plan has to offer — such as a superior bond fund — and then open an account in a different state's plan for the rest of your asset allocation. (There's no limit on how many states' plans you can use.)
Hurley recommends calling your current plan to ask about tax and other consequences of moving, since some states require residents to pay back any tax benefits they've received if they move the money out of state.
If tax or other benefits don't tie you to your state, though, your best move is likely into one of the top-rated plans.
"If you're in a state where there are no local benefits," Lutton said, "then go for it."