Thirty-three plans are Morningstar Medalists, and three receive Negative ratings.
Each year, Morningstar assigns Analyst Ratings to college-savings plans based on five key pillars--Process, People, Parent, Price, and Performance. When evaluating 529 plans, Morningstar also takes into consideration the unique benefits that plans offer to college savers, including local tax breaks, grants, and scholarships, which can influence a plan's Morningstar Analyst Rating but usually do not drive the overall outcome.
In 2016, Morningstar identified 33 plans that it believes to be best-in-class options, assigning these programs Analyst Ratings of Gold, Silver, and Bronze. These plans for the most part follow industry best practices, offering some combination of the following attractive features: a strong set of underlying investments, a solid manager selection process, a well-researched asset-allocation approach, an appropriate set of investment options to meet investor needs, low fees, and strong oversight from the state and program manager. These features improve the odds that the plan will continue to represent a strong option for investors. Gold-rated plans have all or a vast majority of these attributes. Silver- and Bronze-rated plans embody most of these qualities but often have some room for improvement.
Meanwhile, 27 plans earned Neutral ratings. These plans remain unexceptional, either because weaker aspects offset stronger ones or an element of uncertainty, such as an investment team change, clouds their prospects. Some Neutral-rated programs may hold appeal for in-state residents because of meaningful added benefits, such as local tax breaks, so investors should research their state's particular benefits.
Just three plans received Negative ratings in 2016. These plans generally lack compelling traits and have at least one major flaw that makes them worth avoiding. Nationwide, there are 84 529 savings plans, and these ratings represent 97% of assets invested in 529 plans.
This year, Morningstar upgraded six plans and downgraded six, compared with five upgrades and one downgrade in 2015. We also initiated coverage on two plans from Rhode Island and dropped coverage on two small, unexceptional plans: Nevada's Putnam 529 for America and Iowa's IAdvisor 529 Plan; both programs received Neutral Morningstar Analyst Ratings in 2015.
In general, the industry continues to take steps in the right direction, with a number of plans cutting fees, beefing up their asset-allocation resources and processes, or improving the quality of their investment lineups. This article focuses on this year's upgrades. Part two of this series publishes on Thursday and will detail the downgrades. In-depth analyses of all 63 plans under coverage are located on Morningstar.com.
The Gold Standard
Virginia's direct-sold plan, Virginia529 inVEST received a notable upgrade, increasing to Gold from Silver. The plan's sensible approach and strong underlying manager lineup has long made it a compelling option for investors. With fee cuts over the last year, the plan also looks attractive from an expense standpoint, and it now represents one of the best choices available to college savers.