The state of Illinois, in its selection of Citigroup to manage its 529 plan, opted for high fees and disadvantageous options for parents and students looking to save for college, according to Morningstar analyst Russel Kinnel.
By bypassing low-cost options like Vanguard and T. Rowe Price , Illinois made a great decision for powerful banks (namely Citigroup) and elected officials (considering the state makes money off the 529 fees).
But the state did even one worse, according to Morningstar. It installed a rule that disallows tax breaks to anyone choosing another states 529 plan, including ones with lower fees, such as Utahs and Virginias. In addition, it decided to tax all residents who make withdrawals from 529 plans held by other states.
Kinnel explained that when colleague Dan McNeela tabbed the nations five worst 529s back in February, Illinois was not on the list because all McNeela looked at were the plans themselves and not the legislation.
With the laws considered, Kinnel, says, citizens of Illinois "are probably worse off than anyone else."