Morningstar Ranks the Best, Worst 529 Plans

This month, Morningstar released its review of 529 plans. Since all states offer the college funding plans, parents should look at their own state plans first to take advantage of the tax breaks for residents, said Kerry O'Boyle, fund analyst and author of the study.

But the offerings of some states, such as Alabama, Arizona, Maine, Tennessee, and Wyoming, are so poor, according to the ranking, residents should look out of state, starting with the Morningstar's top rankings among broker-sold and direct-sold plans.

Steep fees, mediocre funds, and a lack of a meaningful tax breaks made the plans undesirable, in Morningstar's assessment. For example, Wyoming's 529, charges a 0.95% management fee on top of fees for the underlying funds "that can only be categorized as obscene," according to the report.

Alabama and Tennessee offered no meaningful tax breaks to keep residents instate, and the latter was charging 0.95% for TIAA-CREF funds, which other plans offer for much less. While Maine contributes $200 a year to lower-income plan holders, it also charges them a relatively high fee.

Residents of those states should consider looking at the best 529 plans, which are relatively inexpensive and offer better mutual funds. Alaska T. Rowe Price College, Utah Educational, and Michigan Education ranked top among the direct-sold funds.

Alaska offers T. Rowe Price funds, which stand out among actively managed investments in 529 plans, according to Boyle. Michigan's plan is the cheapest of the TIAA-CREF plans. And Utah, using Vanguard funds, is the least expensive overall plan, charging only .25% over the fund fees.

Since 80% of 529 plan assets are invested through advisers, Morningstar broke out the top broker-sold funds. Virginia College America leads the pack, followed closely by Kansas Learning Quest Education, and Colorado Scholars Choice College.

The Virginia state plan includes 21 investment options from American Funds for maximum diversification at a low cost. The Kansas 529 offers good flexibility with three investment options, conservative, moderate, and aggressive. Although its management fee, at .39%, is a bit high, the management style and low cost of the American Century funds make them attractive, says O'Boyle.

Colorado's plan charges a reasonable fee and offers a strong lineup of investment options: equity funds from Salomon Smith Barney, a bond fond from BlackRock, and an overseas fund from Capital Research and Management.