What's the recipe for a great 529 college savings plan?

According to Investforcollege.com of Williamsburg, Va., which today releases its 2005 quantitative 529 plan ratings, great plans encompass great fund performance and reasonable costs, taking into consideration all of the costs in the 529 plan and how they compare to other savings accounts intended for college savings.

Nineteen of the 72 currently available 529 plans across the nation scored Investforcollege.com's top five-star rating (see ratings chart, beginning on opposite page).

The Investforcollege.com proprietary ratings system scores are based upon the historical performance of the underlying mutual funds in the most aggressive aged-based investment option available, and the total cost to the investor, including investment advisory, 12b-1 and administrative fees. Then, the ratings go a step further by comparing this True Cost of Plan (TCOP) to other educational accounts, such as Coverdell Education and Uniform Gift to Minors accounts. Only those plans that score top grades on both performance and cost are awarded the coveted five stars. The process for calculating a plan's total cost is complex, said Baker, who has applied for a patent for the TCOP process.

So what's the bottom line on the state of 529 plans?

"529 plans are not as expensive as people think they are," said Burt Baker, managing partner, Investforcollege.com. Moreover, many of the investment management firms and state treasurers have worked hard to ensure that the plans are really quite good. Not one of the plans received Investforcollege.com's lowest possible rating of one star. "There are no true flops out there," Baker said, although three of the plans did score only two stars.

In many cases, savers are essentially securing institutional prices on the mutual funds underlying some 529 plans, he noted. In fact, eight plans have negative cost numbers, including: the Florida College Investment Plan, which offers multiple funds; the Hawaii Tuition Edge 529 Plan, which utilizes funds from Delaware Investments; and North Carolina's National College Savings Program, which is comprised of J.&W. Seligman funds.

But costs are only part of the equation, Baker explained. While most plans scored in the 50th to 60th percentile in terms of underlying fund performance, some plans sported standout performers, including funds from Charles Schwab, which are utilized in the Kansas State/Schwab 529 College Savings Plan. The American Funds, managed by Capital Research & Management, in Virginia's College America Savings Plan also offered high returns.

"We are thrilled to have been ranked so high. We've worked hard to have a tool parents can use to save for college," said Susan Loftus, executive director of Indiana Education Savings Authority, about the five-star rating the Indiana CollegeChoice 529 Investment Plan achieved, partnering with One Group Investments. Despite JPMorgan's acquisition of the funds' investment advisor, Bank One, last year and the merging of the firms' two fund lineups last week, there will be no operational changes in the plan, she said.

Loftus explained that since Indiana had one of the nation's lowest number of college graduates, the state decided to create a 529 plan in 1997 to entice state residents to save for their children's college. "We wanted to do something to get parents thinking about saving early, to get parents in the college state of mind," she noted.

Investforcollege.com also gave a five-star rating to the $323 million Alabama Higher Education 529 Fund. The plan launched in June 2002 as a latecomer to the 529 plan party, but has one of the highest total contribution limits ($300,000). The state legislature is currently in session considering allowing in-state tax-free treatment of plan withdrawals, said Anthony Leigh, deputy treasurer. Alabama is the only state not currently allowing tax-free withdrawals. The good performance of the underlying Van Kampen Funds has contributed to the success of the plan, "designed to make sure there is a cost-effective way for Alabama residents to save for college," he said.

The key to a successful 529 plan is educating both the investor and the financial adviser and having a sound asset-allocation program, said Jeff Coghan, vice president and 529 product manager at Van Kampen, a subsidiary of Morgan Stanley, in New York. The Alabama plan offers three aged-based options from aggressive to conservative.

The collaborative decision to have more conservative, greater fixed-income allocations makes the Hawaii 529 plan successful, and played to Delaware's fixed-income investment strength, said Tom McConnell, senior vice president of tax-advantaged products at Delaware Investments.

The best plans, however, also include a strong relationship. "State relationships are crucial. A strong relationship can help a plan excel," said Coghan of Van Kampen.

"When you search for a 529 partner, you want someone who shares your vision," agreed Diana Cantor, executive director of the Virginia College Savings Plan. "The smartest thing I have ever done is pick American Funds," she added. The plan includes 21 American Funds and is successful because the plan is simple and understandable, she said.

Not only have the conservative American Funds performed well, even during the three-year bear market, but the low plan expenses are crucial, said Chuck Freadhoff, vice president and spokesman for American Funds. Both Cantor and Freadhoff agreed that American's use of specially designed share classes - 529-A, 529-B and 529-C - make the plan easy for financial advisers to understand and to explain. Each share class includes a 10 basis point fee to the state.

Launched in March 2003, New Jersey's NJBest College Savings Plan was created as the 529 plan for the common man, said John Iacovelli, senior director of the New Jersey Higher Education Students Assistance Authority. The idea was to "create a plan that would strip away any excuse for why a New Jersey resident would not invest," he said. The department turned to Franklin Templeton because they were looking for an investment firm highly regarded for its performance, he added. Investforcollege.com not only gave the plan five stars but further dubbed it a "Best Bet," one of only six plans to achieve that title.

The only state to hold out on offering a 529 plan is Washington, which offers a prepaid college savings plan instead. "We went through an 18-month assessment," explained Betty Lochner, director of the Washington Guaranteed Education Trust Program. The program decided to nix the 529 plan idea because Washington lacks a state income tax and therefore couldn't provide state tax deduction incentives for in-state residents, she said. In addition, state officials couldn't devise a plan cost effective enough to attract investors, she noted. "We decided there was not a huge benefit for us to offer one. Our goal is to make our prepaid program work," she said.

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