Every year I conduct a search for the best college 529 plans in the nation. Now I don't do this for purely theoretical reasons, as I've been invested in 529 plans for quite a while and my son is only five years from college. Each year, I review the landscape with the possibility of moving my son's college money from Utah's UESP plan to another state's plan, since I'm allowed to move funds once per year.
Here's what my search turned up, along with some advice on what might be best for you.
I use three criteria in selecting a plan, which are:
- Total costs
- Appropriate investment options
Elimination Round One â€" Total Costs
I know that costs take from return, so I first determine how low the total costs of the plan are. This is a combination of administrative costs and the costs of the investment choices. When it comes to options, I want two things - broadly diversified options inside of an age-based portfolio, which will automatically get more conservative as my son approaches the age when he will need the money.
I started by using the Morningstar 529 Center for looking at costs. There were five contenders with costs below 0.35 percent annually.
1. New York's 529 Program 0.25%
2. Utah Education Savings Planâ€" 0.26%
3. Nevada Vanguard 529 Savings Plan â€" 0.28%
4. Ohio CollegeAdvantage 529 Plan â€" 0.29%
5. Iowa College Savings Plan â€" 0.34%
It's not a coincidence that all five of these plans are directly purchased by the consumer rather than sold through advisors. Advisors add quite a bit of costs and I've decided I'd rather have the funds to pay for my son's college than to make an advisor rich, even though I am one. However, all of these states with the exception of Utah have other plans that are sold through advisors, and I'll have more on that in a bit. My colleague, Lynn O'Shaughnessy also identified these same plans as the lowest cost options.
Elimination Round Two â€" Appropriate Age Based Options
The closer the child is to needing the money, the more conservative I want the funds to be invested. I also want to harness the power of inertia and have to do nothing, leaving it to the plan to gradually get more conservative. I also want the broadest of fund choices.
This screen proved to be virtually worthless as all five states had great-age based plans with broad Vanguard funds. The differences between them were minimal. All five stood tall.
Elimination Round Three â€" Trust
This is a very subjective evaluation on my part. I ask the question "How much do I trust each state's administrator to do the right thing?" Put another way, are they more interested in growing their empire by attracting money, or do they actually want to help fund a child's college?
To examine this, I looked at the most expensive options within each state, using Morningstar data. As mentioned, all states except Utah had advisor-sold plans and their highest cost options ranged from 2.50 percent annually to 2.61 percent annually. Any state administrator willing to take out 2.50 percent or more a year in fees is someone I wouldn't trust to do the right thing with my son's college money. Even though I'd be paying low costs, could changes in laws allow them to trap my money? Good bye Iowa, New York, Nevada, and Ohio.
The clear winner â€" Utah!
So it looks as though I'll be leaving my son's college money in Utah's UESP Plan for another year. I'm thrilled that they just lowered their annual expenses (already reflected in the expenses of the contenders). I also love their new customized investment option which allowed me to build an age-based option using the three investment options from the second grader portfolio. Thus, my son is invested in a total US, total international, and total bond fund. My costs actually came out to be only 0.235 percent annually. Just as important, I trust the folks administering the UESP plan to put funding college ahead of attracting more assets.
What this means to you
Always start with your home state and look to see if your home state offers a tax-deduction or credit. SavingforCollege.com or Morningstar are great places to look. If they do, see if your state has a direct plan with total expenses under 0.50 percent annually. You are probably better off contributing to your own state, as the value of the tax-deduction is greater than the losses from higher fees. I put new money into my home state, Colorado, though its costs are still far higher than I'd like.
On the other hand, if your state does not give you a deduction, or your state's plan has outrageously high fees, consider one of the lowest cost plans mentioned in this piece and, specifically, Utah.
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