Morningstar unveils study of the best and worst 529 plans

Morningstar Inc. today released its annual list of best and worst Section 529 college savings plans.

The study, which involved 80 plans, focused on the underlying funds, expenses, diversification, asset allocation and flexibility, the Chicago-based firm said.

Among the best plans, Morningstar said, were the Ohio College Advantage, the Utah Educational Savings Plan Trust, the Indiana CollegeChoice 529 Direct Savings Plan, the Virginia Education Savings Trust and the Virginia CollegeAmerica 529 Savings Plan.

The worst plans, Morningstar said, included the Ohio Putnam CollegeAdvantage Plan, the Nebraska Aim College Savings Plan, the Nebraska State Farm College Savings Plan, the New Jersey Best 529 College Savings Plan and the Montana Pacific Life Funds 529 College Savings Plan.

Some plans made it to the “worst” list because they were too aggressive, said Greg Brown, a Morningstar fund analyst and author of the report.

“We saw many funds that held on to investments that weren’t working and plans that were too aggressive with equity exposure in their age-based options,” he said.

Losses of 35% were realized by nine plans in five states that invested in the Oppenheimer Core Bond Fund (OPIGX) from OppenheimerFunds Inc. of New York, Mr. Brown said.
Although some states removed those investments, most of the plans held on to the strategies for months after the market downturn and some still include the fund, he said.

OppenheimerFunds is disappointed in the performance of some of its fixed income offerings including the Core Bond Fund and has taken several steps to address that based on what was learned from the extreme market conditions in 2008,” wrote Oppenheimer spokeswoman Jeaneen Pisarra in an e-mail. “The company has named a new chief investment officer of fixed income, Art Steinmetz, hired a new globally-experienced director of fixed income, Geoff Craddock, and installed new portfolio managers on several fixed income funds.”

Another problem involved age-based options, where equity exposure is increased over time and some equity allocations strategies went as high as 60% just prior to the student’s anticipated date of college enrollment.
“Many of the age-based options were overly aggressive, and that became really problematic for plans that had only one single age-based option,” Mr. Brown said. “I’m sure we’ll see some serious overhauls of age-based options because the market highlighted the flaws of having too much equity.”

The Ohio Putnam CollegeAdvantage Plan intends to end its money losing days.

“We are very dedicated to improving the performance of our education funds,” said Cliff Schecter, spokesman for Ohio State Treasurer Kevin L. Boyce.

“We are fully committed to making sure that the highest number of people who want to return to school or access higher education are able to do that,” he said. “We are developing a number of creative solutions to achieve that goal.”

Treasury officials or plan administrative authorities contacted from the other plans on the “worst” list weren’t immediately available for comment.

The plans in the study had assets of $80 billion as of Jan. 31.

Each plan offers multiple options, and of the 3,500 options, 93% lost value last year. One-third of those options lost 40% or more amid the market decline, the study found.