Gold, silver and bronze standards. Five-cap ratings.
You’re probably thinking restaurant reviews, movie ratings, international tour packages and such.
But state-sponsored college savings plans, the ones known as 529s? Those too.
We like to know how the experts rate places to eat, movies to watch, the vehicles we drive and a whole host of other things. So it only makes sense there are even ratings that dissect the best out of a growing crowd of 529 plans.
These tax-advantaged programs, including Learning Quest in Kansas and the MOST program in Missouri, attract large pockets of money earmarked to cover rising costs for tuition, books, and room and board.
Much like standard mutual funds, the 529 plans come in a variety of packages of stocks, bonds and other investments that can be suitable for your taste for risk and number of years before college bills hit.
But when sizing up the accounts, families have more to think about than just investment choices. Tax benefits, plan fees and investment performance also come into play and can have a major impact on how much of a college nest egg you’ll have accumulated by the time withdrawals kick in.
That’s where rating services can help lead you through the thicket. Two in particular are worth checking out: Morningstar, best known for setting the standard for rating mutual fund products, and Savingforcollege.com, a nationally recognized online service that tracks the 529 industry.
The rating services use different analytical methods to arrive at the results. But both generally use the same criteria, such as investment process, plan fees, risk, performance over time and an assessment of the investment management team.
Morningstar released its latest annual ratings in October of the 64 largest 529s. It assigned gold, silver and bronze ratings to plans that were likely to outperform their peers over the long term.
It’s stingy with the hardware.
This year, for example, Morningstar awarded gold medals to four state plans, silver medals to four plans and bronzes to 21. But it also issued 32 neutral ratings on plans that it said were not likely to deliver standout returns but would not sigificantly underperform either. Three plans received negative ratings for having at least one major drawback that could hinder future performance.
Savingforcollege relies on a mortarboard “cap” system of zero to five, with five caps being the best.
The Savingforcollege rankings, which are updated quarterly, gives many plans top four-cap and five-cap designations. It also assigns a separate state resident and non-resident rating in recognition of the many states that offer special tax incentives or other benefits to residents who enroll in their 529 plan.
How much faith should you place in the ratings?
David Jackson, a financial adviser with Waddell & Reed in Kansas City, said rating services are overrated.
“The ratings are all about what has happened in the past,” Jackson said.
More important than gold-standard or five-cap ratings, he said, are making sure your 529 investments are properly allocated based on your risk tolerance among stocks, bonds and other fixed-income products, and cash.
The rating systems are another tool, another piece of information. But keep in mind that investing solely on a ranking is rarely a good idea.