Average balances in 529 college savings plans fall far short of projected higher education costs in most situations, according to Morningstar’s latest research paper and industry survey, released on Monday.

The average 529 account balance was $9,700 in March 2009, according to data that Morningstar culled from the Investment Company Institute. The College Board estimates that amount would cover one year of in-state tuition at a public university, estimated at $7,020. Stacked up against the annual cost of an out-of-state public school, $18,548, or a private institution, $26,273, and the shortfall looks even more severe.

There are several reasons for the lower account balances, starting with the fact that college savers typically open accounts when their children are between seven and 10 years old, giving most families about 10 years to save before they have to start using the money. Also, many plans require very little to start the accounts, some less than $100, so the balances range widely across the spectrum of savers.

Also, 529 savings plans took a huge hit during the 2008 market crash, plummeting nearly 24% that year. As a results, many 529 providers have changed their plans to include options that allocate fewer asset to equities in the years leading up to the college spending years. Also, more than a dozen plans include FDIC-insured options for those who prefer to keep the assets in cash. All told, 529 plans had $176 billion in assets by Sept. 30, 2010, according to data from Morningstar, the Investment Company Institute, and the College Savings Plans Network.

Transparency is also an issue for some participants, according to Morningstar. The investment options in 529 plans are not registered with the Securities and Exchange Commission, because they are technically considered municipal securities. Although offering documents are usually available online at the state or plan’s Web site, they are difficult to compare side by side, so it can be tough to cull basic investment information on the investment options in the plan. Morningstar acknowledged that if parents do not feel confident in the quality of the investments they are making, they will be less likely to put their money into the plans. 

Some of the data in Morningstar’s latest report was potentially encouraging, however. After evaluating 82 plans, Morningstar says that Alaska, Maryland, Nevada, Ohio and Virginia took top ratings in all five areas it uses to rate such plans. Those measures are: portfolio, performance, price, parent, and people. To boot, three of the top five plans either predominantly or exclusively used the direct sales channel. Advisors sold 62% and 96% of the assets in Alaska’s and Virginia’s plans, respectively, according to Morningstar. The top five plans had $57 billion in total assets, according to Morningstar.