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Morningstar Report on 529 College-Savings Plans Shows Rapid Asset Growth, Shrinking Expenses

Monday, April 22, 2013

Morningstar Report on 529 College-Savings Plans Shows Rapid Asset Growth, Shrinking Expenses

12:43 EDT Monday, April 22, 2013

529 Plans Lag Traditional Open-End Funds' Performance, But Tax Benefits May Close Gap

CHICAGO, April 22, 2013 /PRNewswire/ -- Morningstar, Inc., a leading provider of independent investment research (NASDAQ: MORN), today issued a report on the landscape of 529 college-savings plans in the United States. The report evaluated all 86 U.S. plans, which have more than $166 billion in total assets under management as of Dec. 31, 2012.

"College savers are still showing enthusiasm for 529 plans, and the investments are getting cheaper overall," Laura Pavlenko Lutton, director of fund of funds research for Morningstar, said. "529 investment option returns haven't kept up with similar mutual funds in recent years, though we expect the performance gap to close over the long term because of the tax benefits of 529 options."

Morningstar analysts evaluated the current 529 college-savings plan market by total assets under management, asset flows by category, assets by state, investment process, plan structure, performance, price, management, and other metrics. The report is a companion piece to the Morningstar Analyst Ratings for 529 College-Savings Plans, typically issued in October.

Key findings of the report:

  • Total assets in 529 plans rose 25 percent in 2012.
  • Traditional open-end mutual funds have outperformed 529 plans investment options over the past five years. Age-based 529 options also have trailed their benchmarks. Higher expenses are likely to blame for much of the performance shortfall, as 529 investment options' have extra layers of expenses that can bump their total expense ratio 20 to 30 basis points higher than fees for similar mutual fund offerings.
  • Despite having higher expense ratios than open-end funds, 529 plan investment options have steadily lowered their fees. In all Morningstar 529 categories, average total expense ratios are lower in 2013 than they were in 2011.
  • Direct-sold 529 plans continue to gain market share at the expense of advisor-sold plans, a trend that may reflect the rise of independent, fee-only advisors, who typically aren't paid on commission and may be more likely than an affiliated advisor to direct client assets toward a cheaper direct-sold plan. Also, some direct-sold 529 plans have begun to specifically target RIAs in their marketing campaigns and investment offerings.
  • Conservative allocation investment options have gained the most in new flows among all static portfolios in Morningstar 529 plan categories over the past 12 months, with more than $1 billion in assets added as of Jan. 31, 2013, according to Morningstar's data.
  • Virginia's 529 plans have the most assets under management by a wide margin?more than $37.5 billion. New York's plans, the second-largest, have more than $14 billion in assets under management.
  • "Closed architecture" plans, which include investment options with underlying investments from a single provider, have outperformed "open architecture" plans, which include investment options with underlying investments from a number of providers, on a risk-adjusted basis over the long term. The closed architecture plans also had lower expenses.

Morningstar's 529 plan landscape study is available here: http://global.morningstar.com/529Landscape2013. Additional information and state-by-state comparisons can be found on the Morningstar.com 529 Plan Center at: http://529.morningstar.com/state-map.action.  Morningstar's 529 plan research and data also is available through Morningstar Advisor Workstation and Morningstar Office, its software platforms for financial advisors; and Morningstar Direct, its global investment analysis platform for institutional investors.

About Morningstar, Inc. Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offers an extensive line of products and services for individuals, financial advisors, and institutions. Morningstar provides data on approximately 416,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 9 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its registered investment advisor subsidiaries and has approximately $149 billion in assets under advisement and management as of Dec. 31, 2012. The company has operations in 27 countries.

The above is for education purposes only; any mention of a specific 529 college-savings plan should not be considered a solicitation by Morningstar.

©2013 Morningstar, Inc. All rights reserved.

MORN-R

Media Contact:Shawn Malayter 312-696-6050, shawn.malayter@morningstar.com

SOURCE Morningstar, Inc.

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