Is It Time to Change Your College Savings Plan?

College Savings Plan

Most 529 plans have lowered fees and smoothed glide paths to reduce risk, but some have fallen behind.

Morningstar’s new 529 plan ratings show most college savings providers have lowered fees and smoothed glide paths, but some plans have fallen behind.

College savings plans are a great way to save for education. But not all college savings plans are great.

Most state-sponsored 529 college savings plans, which allow you to invest in a tax-advantaged account for future education costs, have improved significantly in recent years, says Madeline Hume, analyst for multi-asset and alternative strategies at investment research firm Morningstar. Plans have lowered fees, improved investment options and smoothed investment “glide paths” to reduce risk.

But not every plan is keeping up. Morningstar recently downgraded eight state plans and advised most savers to avoid five others, often for excessive costs.

If youre saving for a childs education in a 529 plan, or want to start, its a good time to review your options because there may now be a better choice.

Aiming for a smoother landing

Most of the money saved in 529 plans is invested in age-weighted options that reduce exposure to stocks as the child gets closer to needing the money. In the past, 529 plans might keep the same portfolio of investments for four years or more before selling and moving into a supposedly less risky portfolio in a single day, Hume says. But those sudden movements werent risk-free.

“Especially if theres a large market drop on a particular day, that investor could lock in losses that may be hard to recoup,” Hume says.

Today, many plans mimic target-date retirement funds, which reduce risk gradually. Even plans that still sell one portfolio of investments to buy another tend to do so more often to reduce the possibility of locking in big losses and give investors a smoother ride, she says.

Californias decision to move its ScholarShare College Savings plan to a progressive glide path helped earn it a gold rating this year, up from last years silver. Three other plans — Bright Start College Savings in Illinois, Invest529 in Virginia and my529 in Utah — also earned top marks for their glide paths, low fees and best-in-class investment options.

Most plans continue to slash fees

The investment industry has been slashing costs and eliminating commissions at a “dizzying” pace, so plans that havent done so have started to look unattractive, Hume says.

Morningstar downgraded Nevadas The Vanguard 529 College Savings Plan, a top-rated plan since 2012, from gold to silver status for this reason. Its fees remain below average but are no longer among the cheapest, Hume says.

Cost was also the reason that four other plans received negative ratings. Those plans include North Dakotas College SAVE Plan, New Jerseys Franklin Templeton 529 College Savings, Arkansass GIFT College Investing Plan and Nebraskas TD Ameritrade 529 College Savings Plan.

The fifth plan to flunk out was Nevadas USAA College Savings Plan. Morningstar downgraded the plan after Victory Capital Holdings bought USAAs asset management business and added its own managers to all the underlying equity funds. The switch happened before Nevada state officials had time to vet the changes, Hume says. Strong state oversight is a key factor in Morningstars rating system because it deters investment firms from making money at the expense of investors.

What you should do now

You generally can change 529 providers once every 12 months without triggering IRS taxes and penalties. But youll want to consider state tax treatment, as well.

Most states offer residents a tax break for 529 contributions, and may require you to pay that back if you transfer the account to another states plan. If you get a tax break and your plan isnt on Morningstars naughty list, it may make sense to stay put, depending on the size of that break, the states policies on paying it back if you move and the plans quality. Check the plans site for details.

If your state plan did get a negative rating, you have alternatives. Many states offer more than one plan, and Nebraska, New Jersey and Nevada all have better-rated options. Also, Arkansas is one of the seven states that give a tax break for investing in any states plan, not just its own. (Arizona, Kansas, Minnesota, Missouri, Montana and Pennsylvania are other “tax parity” states.) Plus, your state could clean up its act. Florida 529 Savings Plan jumped from negative to bronze this year after revamping its plan.

Not all states offer tax breaks, of course. Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming dont have state income taxes, while California, Delaware, Hawaii, Kentucky, Maine, New Jersey and North Carolina dont offer tax deductions or credits for 529 contributions.

If your state doesnt reward you for staying or punish you for straying, theres little downside to moving your money to a better plan.

This article was written by NerdWallet and was originally published by The Associated Press.

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