Our Picks

The Best 529 Plans

Karen Wallace, CFP®

There are lots of benefits to using 529s to save for future college costs. They are funded with aftertax dollars, which then grow tax-free. Withdrawals for qualified education expenses are also tax-free. On top of that, some states offer tax deductions or credits for contributions.

Because of these money-saving tax benefits, 529s are becoming increasingly popular: According to data from the College Savings Plan Network, U.S. families had invested $319.1 billion in 529 accounts as of year-end 2017, a 16% increase over 2016 levels. 

But not all 529 plans are created equal. Some plans are saddled by high fees and poor investment choices, which can hamper your savings progress and erode your returns. Morningstar analysts carefully evaluate 529 plans and assign medalist ratings based on their scores in five key areas: Process, People, Parent, Price, and Performance. 

If your state's plan leaves much to be desired, you have no obligation to invest in it. Investors are free to choose any state's plan. If you are in a state that doesn't offer any tax benefits for 529 contributions, or in a state that offers tax benefits regardless of the state 529 plan used (these are commonly referred to as tax-parity states), you may want to take a look at the  plans Morningstar analysts have awarded Gold, Silver, or Bronze medals.

If you live in a state that does offer tax benefits, though, they should factor into your decision-making. Morningstar researchers have calculated that a 5% state tax benefit is a generous enough incentive to stay in state regardless. (In other words, a tax benefit level of 5% or greater can make up for less-than-compelling investment options and high fees.) 

The four plans profiled below earn Morningstar Analyst Ratings of Gold. Premium members can read in-depth analyses of all plans under coverage in the 529 Plan Center on Morningstar.com.

 Utah's my529 plan
The my529 has sought to provide a high level of investor choice. This was the first plan to offer set-it-yourself age-based options, allowing investors to build an asset-allocation path from scratch and select from a broad suite of funds to fill each portfolio. The plan also offers four preset age-based tracks, which is unusual--typically plans that invest in Vanguard index funds follow three risk-based tracks. Two of the tracks--Aggressive Domestic and Aggressive Global--follow the same asset-allocation path as beneficiaries approach college age, with the former keeping its stock allocation invested only in U.S. stocks and the latter holding both U.S. and non-U.S. stocks. The Moderate and Conservative tracks provide global exposure to stocks and invest primarily in low-cost, broad-based Vanguard index funds.

The underlying funds available in the custom investment options, as well as additional stand-alone choices, are a mix of proven strategies. In addition to a suite of Vanguard funds, the plan offers 10 Dimensional Fund Advisor strategies. DFA takes a slightly more active approach to constructing its funds but, like Vanguard, keeps a keen eye on controlling costs. Seven of the DFA funds included in the plan are Morningstar Medalists, reflecting the analysts' view that these funds are likely to outperform their peers on a risk-adjusted basis over the long term.

Utah frequently makes incremental improvements that result in small but steady fee reductions. Most recently, reductions of 1 basis point or less in most portfolios result in age-based portfolios that now charge between 0.16% and 0.19%--competitive compared with other predominantly index-based, direct-sold plans, even as peers cut fees.The plan offers a tax credit for Utah residents and other matching grant programs, adding to its appeal for those who qualify.

--Madeline Hume

 Virginia's Invest529 plan
Virginia's Invest529 plan remains on the cutting edge of the 529 industry, continuing to add access to investments not often available to retail investors. The plan's well-diversified approach, strong underlying investments, and competitive price tag make it a topnotch option for college savers.

The plan's age-based portfolios include specialty asset classes not typically seen in direct-sold plans. At the end of 2017, the plan replaced Morgan Stanley Global Real Estate with a combination of two private real estate strategies--offered by Blackstone and UBS--and passively managed Vanguard Real Estate Index in attempt to temper the exposure's volatility without compromising return. The plan sensibly blends active and passive management within the age-based portfolios, keeping costs in check while retaining the potential for outperformance. The portfolios hold passive strategies in broad asset classes, such as U.S. large-cap equity and core bond, and active ones in niche asset classes, including high-yield bond and emerging-markets equity. Gold- and Silver-rated Vanguard funds provide passive exposure. On the active side, international equity stands strong.

Encouragingly, Virginia continues to chip away at the plan's already competitive fees. Virginia residents may deduct up to $4,000 of contributions per account from their state income, leaving little reason to look elsewhere. Nonresidents may also want to size it up against other plans.

--Jeff Holt, CFA

 Illinois' BrightStart Direct-Sold College Savings program
Illinois' Bright Start Direct-Sold College Savings Program became a topnotch plan following a complete overhaul in July 2017. At that time, the state replaced program manager Oppenheimer Funds with Union Bank & Trust, revamped the investment lineup, and cut fees.

Hands-off investors can invest confidently in either of the plan's two types of age-based portfolios. Both types offer three tracks based on risk tolerance that follow the same asset-allocation paths, but the Multi-Firm portfolio combines active and passive strategies from a variety of firms, while the Index series sticks mainly to Vanguard index funds. Both types of age-based portfolios have strong investments under the hood. The Index series holds eight Vanguard index funds, while the Multi-Firm series includes 15 actively managed strategies run by well-regarded asset managers, such as BlackRock, DFA, Dodge & Cox, and T. Rowe Price. Investors can also select from a robust lineup of 16 individual options to create custom portfolios.

The revamped plan boasts low fees. The treasurer holds significant sway over the state's 529 plans, leaving them vulnerable to changes in that elected official, but the current team has been active in its oversight and has established a defined process that can be expected to endure political change. Illinois' state tax deduction on contributions ($10,000 individual/$20,000 joint) adds appeal for residents, but nonresidents may also find the plan compelling. 

--Jeff Holt, CFA

 Nevada's The Vanguard 529 College-Savings Plan
The Vanguard 529 College Savings Plan remains the cheapest plan run by Vanguard that reflects the firm’s best thinking. That said, a handful of plans offer lower fees.

In 2017, the plan’s three age-based tracks—Aggressive, Moderate, and Conservative—began taking more-measured reductions in equity exposure as the beneficiary ages. Investors in the tracks now move through 12 age-based portfolios, each with a 10% equity reduction as the beneficiary approaches college. The building blocks of the age-based portfolios are Vanguard’s well-regarded index-tracking products. The only actively managed product in this series is Vanguard Inflation-Protected Securities. The plan also offers a suite of stand-alone index funds and five actively managed options from Vanguard.

The plan’s age-based options charge a 0.16% fee that ranks below average. However, several plans under our coverage offer cheaper age-based indexed portfolios. Moreover, the state’s resources are stretched thinner than what’s typical at top-rated plans (the state now oversees five distinct 529 plans, without commensurately increasing their administrative resources). Still, this remains a top choice.

-- Madeline Hume