By Eileen Ambrose, The Baltimore Sun
5:03 PM EDT, October 19, 2012
Two college savings plans managed by T. Rowe Price rank among the best in the country — the eighth time that the Baltimore-based investment firm has been included in Morningstar's annual survey of top plans.
Only once — the year after the 2008 market crash — has a Price-managed plan not made the list since Morningstar began ranking so-called 529 plans in 2004.
"They have been an industry leader for a long time," said Laura Pavlenko Lutton, head of Morningstar's 529 plan research. "What really appeals to us about the plans is that T.Rowe has a very steady approach to its investment process. It's been proven over the long term."
College savings plans, often referred to as 529s for the tax code that created them, are sponsored by states, which usually then hire professional managers to run them. Contributions typically are invested in a portfolio of mutual funds, and withdrawals are free of tax if the money is used for college. Total assets in these plans reached $162 billion at the end of September, according to Morningstar.
In the ranking released this month, Morningstar graded 64 plans on a variety of measures, including fees, performance, stability, plan design, state tax breaks, fund managers and even the level of state oversight. With parents committing 18 or so years to the plan, it's important that state administrators are looking out for investors' interests, Lutton said.
"T. Rowe has scored well on that," she said.
Morningstar awarded four gold medals — with two of them going to the Alaska and Maryland plans managed by Price since 2001. The plans of Utah and Nevada received the other gold medals. Twenty-three plans received silver or bronze medals, including the Colorado plan that's managed by a subsidiary of Baltimore-based Legg Mason.
Morningstar said the Price plans "offer high-quality active strategies at a reasonable price."
Price has developed long-term, strong relationships with its state partners, said Tom Kazmierczak, Price's senior product manager for 529 plans. That differentiates the company, he said, from the rest of the industry.
"It allows us to develop a true partnership and work closely to find out what is best for their state residents," Kazmierczak said.
Price's contract with Alaska prevents the company from taking on plans for many states, but Kazmierczak said Price wouldn't be interested in doing that anyway.
The Maryland College Investment Plan had nearly $2.8 billion in assets at the end of September — with $10 million of that in new contributions for the year. The Alaska T. Rowe Price College Savings Plan has about $1.36 billion in assets. (Price also manages a smaller plan for Alaska with $305 million in assets.)
College savings plans usually include a series of age-based portfolios. Investors select a portfolio tied to the date the student is expected to enter school. The portfolios invest aggressively in stocks when children are young and gradually become more conservative as they near college.
Morningstar notes that the Alaska and Maryland plans tend to hold a larger stake in stocks than the industry average. That has come back to bite them.
After the 2008 stock market crash that caused college accounts nationwide to plummet, Price's Maryland plan didn't make Morningstar's list of top plans. Morningstar explained at the time that Maryland offered only one age-based portfolio for students in college, and that portfolio — with about 20 percent in stock — might be too aggressive for some investors.
The market plunge, though, had many 529 managers re-evaluating their strategies, including Price. The company added a conservative money market fund in the Maryland plan in late 2009, but stuck with its 20 percent stock, 80 percent bond allocation for college-age students, Kazmierczak said.
"We have come to the conclusion that while there is some additional risk that comes with that, we are up against not just inflation but tuition inflation," he said.
Tuition has been going up much faster than overall inflation, and stocks can help keep up with the cost, he said.
"Typically, we are seeing students take five years to finish a degree, and that is a long time," Kazmierczak said.
If tuition is rising 6 percent a year, he said, that's a significant jump over five years.
Still, parents uncomfortable with the amount of stock in their portfolio can switch to more conservative options, he added.
The Colorado plan managed by Legg Mason Global Asset Allocation LLC was one of 19 plans awarded a bronze medal.
The plan has "had some performance challenges in recent years," Lutton said.
But she noted that Colorado administrators have changed the investment lineup, adding the best funds across Legg and its subsidiaries.
Colorado's bronze medal also partly reflected a generous tax break offered by the state, Lutton said. Colorado allows residents to deduct their entire contributions to the plan on state income tax returns.
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