Morningstar Advisor - Summer 2008 - 39

an excellent plan). The tie-breaker came down to fees: The Illinois plan’s index option has annual asset-based fees that are slightly below what the Utah plan offers. (Annual asset-based fees include the underlying fund expenses and the program and state charges. They don’t typically include annual maintenance fees or sales charges for those going the broker route.) Maryland College Investment Plan between 65 basis points and 1.10% in annual asset-based fees for A shares. (Remember, sales charges are layered on top of these fees.) Colorado Scholars Choice College Savings Program Components of a Good 529 Plan Diversification Not reliant on any one area of the market. Reasonable Fees Lower expenses create less drag on returns. Flexibility Adjustable asset allocation. Strong Underlying Funds Seasoned managers, shareholder-friendliness, and sound strategies. Managed by T. Rowe Price, this direct-sold option remains a favorite for investors in search of solid actively managed funds. The age-based portfolio includes top-tier funds, including the well-diversified T. Rowe Price Spectrum Income RPSIX, a Morningstar Fund Analyst Pick in the multisector-bond category. The plan has a sensible split between value and growth strategies and also includes plenty of mid- and small-cap exposure. Investors can customize their plans with the help of five static portfolios. Low fees round out the plan’s appeal. Its portfolios range from 68 basis points to 97 basis points in annual asset-based fees. Virginia Education Savings Trust and Virginia CollegeAmerica 529 Savings Plan We like Scholars Choice College Savings Program’s sensible split between growth and value strategies. Investors have a few static portfolios at their disposal as well, which allows for some customization. The primary draws, however, are reasonable expenses and a star-studded lineup of managers, including Bill Miller, small-cap maven Chuck Royce, and impressive bond squads from Western Asset Management. Miller’s Legg Mason Value LMVTX has taken it on the chin in recent years, causing some to question Miller’s expertise. We think Miller has a good shot at rebounding, however. Moreover, while that fund plays a large role early on in the age-based portfolios, it doesn’t have much impact later on, so those approaching college haven’t had to swallow much of its recent losses. Honorable Mentions at the managers’ offices. Until things stabilize at Putnam (which might not be for quite some time), investors should steer clear of this plan. Mississippi Affordable College Savings Program and Mississippi Affordable College Savings Advisor Program Both the direct-sold Virginia Education Savings Trust and Virginia’s advisor-sold CollegeAmerica are best in class. The Education Savings Trust offers an appealing collection of stellar active managers and proven index offerings in its age-based option, including Vanguard, Templeton, and Capital Research and Management (American Funds). It also boasts a collection of single-fund choices that investors can pull together for ample diversification, such as a REIT index, an inflation-protected securities fund, and an international fund. Investors don’t pay a big price tag for that flexibility and diversification, either. Total annual asset-based fees clock in between 31 basis points and 57 basis points. Meanwhile, CollegeAmerica remains a favorite for its broad assortment of excellent American Fund mutual funds spanning many asset classes and strategies. This broker-sold option also is low priced, costing investors anywhere Similar to the Utah Educational Savings Plan, the College Savings Plan of Nebraska, a member of the best list last year, is still a great choice for the college savers going the direct route. Cheaper plans nudged it off the list this year, but investors can still find excellent funds, ample diversification, and plenty of flexibility for a reasonable price here. The Worst Ohio Putnam CollegeAdvantage We are increasingly concerned about Ohio’s advisor-sold Putnam CollegeAdvantage. The funds have had bad performance, and we’ve seen troublingly high turnover among managers, analysts, and executives at Putnam. Putnam fired the comanagers at the helm of the plan’s large-growth fund, Putnam Voyager PVOYX, at the start of 2008, for example, leaving the fund in the hands of an interim manager until it can find a replacement. The best asset managers have strong cultures that keep key people in place, but unhealthy ones have revolving doors We take issue with the direct-sold and the advisor-sold Mississippi 529 programs. The program manager, TIAA-CREF, levies a hefty 70-basis-point program-management fee on both plans, which rely heavily on index funds. Not only does that erode much of the advantage of low-cost index funds, but it’s also hard to determine what TIAA-CREF is doing to earn such high fees. The direct-sold plan offers limited options, with only an age-based portfolio, an all-equity portfolio, and a guaranteed option available to investors. The advisorsold plan also lacks flexibility, and it doesn’t include TIAA-CREF’s usual targeted exposure to real estate or inflation-protected bonds. The state offers handsome tax deductions on plan contributions, but given these lackluster options, we think Mississippi residents should seriously consider their alternatives. New York 529 College Savings Program We’re bothered by New York’s 529 College Savings Program’s lack of diversification. The direct-sold plan is moderately priced and MorningstarAdvisor.com 39

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Morningstar Advisor - Summer 2008

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