College savings plans offered through the states of Alaska, Maryland, Nevada, and Utah earned top marks from Morningstar Inc. in the company’s annual update to ratings of so-called 529 plans.
Another four plans received second-rung silver medal ratings from Morningstar, which found that many of the state-sponsored plans reduced fees and improved investment options over the past 12 months.
The Chicago company is best known for its research on mutual funds, but it also rates 529s, named after the federal tax code that created them in 1997. States set their own guidelines for these investment accounts, which permit withdrawals for college expenses to be made free of federal taxes.
The plans are popular because of the tax benefits they offer, compared with stashing savings in bank accounts or certificates of deposit. Investors are not limited to investing in their own state’s plan. However, there’s frequently an incentive because about two-thirds of states extend state tax deductions or credits to residents.
Some plans are ‘‘direct-sold,’’ meaning parents can open accounts directly through an investment firm or the state plan administrator. ‘‘Adviser-sold’’ plans are available through financial advisers. They generally charge higher fees than direct-sold plans but come with professional advice. Some states offer more than one plan, and investment options vary within plans.
In its ratings update, Morningstar assessed 64 plans that manage more than 95 percent of the total assets in 529s. Plans were rated from gold, silver, and bronze down to neutral and negative.
Each of the four plans earning gold medal ratings this year also won top marks last year:
P- Alaska’s T. Rowe Price College Savings Plan, managed by T. Rowe Price;
PP- Maryland College Investment Plan, also run by T. Rowe Price;
PP- Nevada’s The Vanguard 529 Savings Plan, managed by Upromise Investments Inc.;
P- PUtah Educational Savings Plan, managed by the agency of the same name.
Four plans received silver medal ratings, while 19 plans were rated bronze and 33 neutral. Four received negative ratings.
‘‘Over the past 12 months, we continued to see 529 plans push for lower fees and higher quality investment options, and both of these trends directly benefit college savers,’’ said Laura Pavlenko Lutton, who oversees Morningstar’s 529 ratings.
‘‘Unfortunately, not all plans have jumped on these investor-friendly trends, and in a handful of cases where we found high expenses or poor-quality investments, we gave the plan a negative rating,’’ Lutton added.
The four negative-rated plans are: Kansas’ Schwab 529 College Savings Plan, managed by American Century Investment Management; Minnesota’s College Savings Plan, run by TIAA Tuition Financing; and the direct-sold and adviser-sold plans from Rhode Island’s CollegeBoundfund, managed by AllianceBernstein.