College Savers Deserve Better
By David Falkof | Morningstar – Thu, Oct 18, 2012 7:00 AM EDT
When making a big decision--buying a car, sending a child to school, seeking medical treatment--we all require some basic information in order to make a sound choice. Would you buy a car without knowing the make and price? Would you send your child to school without knowing her teacher's name? Would you receive medical treatment without knowing what it was for?
College savers need the same kinds of details when picking a 529 plan, yet often the information either isn't provided or takes too much digging to find. A new Morningstar study of 529 plans' disclosure found that the typical 529 plan website and plan document provide only high-level descriptions of the investment options. Basic information--including the name and tenure of the portfolio managers running the 529 investment options, and details about the most recent portfolios--isn't required disclosure for 529 plans, even though 529 plans collectively invest more than $162 billion of college savers' capital.
Morningstar privately collects data from 529 plans each month, including detailed information on the plans' investment options, performance, and fees, but such reporting is largely voluntary. Sometimes plans fail to routinely provide monthly returns or total assets under management. That's why Morningstar publicly advocated for better disclosure last year in a letter to the Municipal Securities Rulemaking Board (MSRB) and continues to believe good transparency is necessary for college savers to accurately compare and monitor 529 plan investments.
As part of our annual research into 529 plans, Morningstar's fund analysts compiled a list of information we'd like to see each plan disclose so that we can properly evaluate their investments and determine which are most likely to help college savers reach their goals. We looked through each plan's website and its program document (the 529 plan's version of a prospectus) to see what data was available.
What Investors Need to Know: Static Options
Specifically, for the plans' static options, we want to know how much the option costs, who manages the portfolio and for how long have they been at it, what the investment strategy is, what the portfolio owns, and what the performance record is. Some static options have multiple underlying investments, so we look at information on the option as a whole as well as for each underlying component.
Specifically, for the plans' static options, we want to know how much the option costs, who manages the portfolio and for how long have they been at it, what the investment strategy is, what the portfolio owns, and what the performance record is. Some static options have multiple underlying investments, so we look at information on the option as a whole as well as for each underlying component.
The attached checklists (Table 1a and Table 1b) compiled in July and August, show which plans disclose these important pieces of information for static options. Not one 529 plan meets all the criteria.
To be sure, some plan websites come close. Wisconsin's EdVest College Savings Plan serves as a good example of how to link information about underlying investments to the static options. More commonly, though, plans merely tell the investor which mutual fund a static option owns but offer no more information. Louisiana Start Saving for College, for instance, provides step-by-step instructions on how to look up the underlying funds not on its own website, but Vanguard's.
In Table 1b, the six notably sparse columns refer to portfolio and manager data that Morningstar fund analysts regularly use to evaluate a fund's risk exposures and to monitor the stability of the management team. For stock fund portfolios, we use market-cap and sector weightings to establish whether an investment is primarily exposed to big or small companies, or firms in a specific sector of the economy, like health care, technology, or energy. This information helps us anticipate how an investment will perform and identify potential risks.
With bond portfolios, we look at an investments' credit-quality and interest-rate exposures to broadly understand how it will perform in different market environments. For example, a portfolio with low credit quality will usually outperform in bull markets, when investors are less risk-averse, but it could post steep losses in a downturn.
We look to see who manages the investment and how experienced they are. This information is critical for monitoring the stability of the management team and the relevance of the performance history.
What Investors Need To Know: Age-Based Options
Morningstar's transparency audit showed that few 529 plans provide this valuable information. As professional investment researchers, we can dig up this information by cross-referencing 529 investments with data on the plan's ultimate mutual fund holdings, but college savers would be much better served if this portfolio and manager information were easily accessible.
Morningstar's transparency audit showed that few 529 plans provide this valuable information. As professional investment researchers, we can dig up this information by cross-referencing 529 investments with data on the plan's ultimate mutual fund holdings, but college savers would be much better served if this portfolio and manager information were easily accessible.
The age-based options call for an even greater standard of disclosure. These options hold the majority of 529 assets and have a similar structure to the popular target-date mutual funds found in retirement savings plans. Age-based options' asset allocation becomes more cautious over time, moving college savers' assets from primarily stocks when the beneficiary is young to primarily bonds and cash as college enrollment nears. For an age-based option, we'd like to know how much it costs and who's managing the portfolio, but we'd also like a description of the asset allocation strategy, the strategies of the underlying holdings, and the performance record.
In this second set of checklists (Table 2a and Table 2b), we show which plans met our criteria for the age-based options. Again, none of the 529 plans receive checks across the board, and there is a wide range in quality of the information available. On the positive end, the Illinois Bright Directions website provides useful portfolio and performance data related to the age-based option as a whole and the underlying investments. Meanwhile, the Nebraska State Farm College Savings Plan's website met none of the criteria.
While many plans receive check marks in the columns related to fees and performance (Table 2a) and glide path and portfolio (Table 2b), the Upromise-managed plans are missing several key disclosures. The many direct-sold Upromise plans generally feature the same Vanguard investment options, and all of them suffer from the same poor disclosure for the age-based options. Whereas rival plans disclose the performance and holdings of their age-based options, the websites for the Upromise plans provide no details beyond the broad asset allocations, such as at New York's 529 College Savings Program. Instead, investors need to dig into the plan documents and other parts of the website to find this information.
Even the Gold Medalists Can Improve
The disclosure disparity between mutual funds and 529 plans is even apparent at two of Morningstar's Gold-rated plans: T. Rowe Price College Savings Plan and The Vanguard 529 College Savings Plan. These two firms also offer target-date retirement mutual funds and, for the most part, the people overseeing the target-date funds are the same as those overseeing the 529 plans' age-based options. Despite the similarities in structure and people running the investments, the firms' 529 plan websites are substantially less informative than their target-date websites.
The disclosure disparity between mutual funds and 529 plans is even apparent at two of Morningstar's Gold-rated plans: T. Rowe Price College Savings Plan and The Vanguard 529 College Savings Plan. These two firms also offer target-date retirement mutual funds and, for the most part, the people overseeing the target-date funds are the same as those overseeing the 529 plans' age-based options. Despite the similarities in structure and people running the investments, the firms' 529 plan websites are substantially less informative than their target-date websites.
The T. Rowe Price mutual fund website, for instance, includes abundant detail about the portfolio construction, tactical shifts, and performance of the target-date funds. The page for T. Rowe Price Retirement 2025 provides commentary on the fund's performance and allows investors to look at the portfolios of the underlying funds. But on T. Rowe's 529 plan website, the portfolio detail is limited to the name and allocation of the underlying funds.
Similar discrepancies show up on Vanguard's website. The firm's mutual fund website includes a helpful video explaining the target-date funds and provides clear disclosure of the underlying funds. On Vanguard's 529 website, though, the portfolio information for the age-based options is limited to broad asset allocations, such as stocks and bonds.
Transparency Matters
Morningstar maintains that more-informed investors make better investment decisions, but most 529 plans aren't providing the basics that college savers need to make informed choices. Just as mutual fund investors can get access to the appropriate data to monitor and evaluate a fund, college savers deserve an equally high standard of transparency. Importantly, the data should be timely and easily accessible. Examples of good disclosure exist in both the 529 plan and mutual fund industry, so plans with poor transparency should emulate the disclosures of their peers.
Morningstar maintains that more-informed investors make better investment decisions, but most 529 plans aren't providing the basics that college savers need to make informed choices. Just as mutual fund investors can get access to the appropriate data to monitor and evaluate a fund, college savers deserve an equally high standard of transparency. Importantly, the data should be timely and easily accessible. Examples of good disclosure exist in both the 529 plan and mutual fund industry, so plans with poor transparency should emulate the disclosures of their peers.
Fund Research intern Jordan Einhorn compiled the checklists attached to this article. This study would not have been possible without her tireless efforts.
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