For the past couple of years, Maryland's college savings plan has been ranked among the five best in the country in Morningstar's annual study of 81 plans.
Last week when Morningstar released its rankings for 2009, Maryland was missing. What happened?
The Maryland College Investment Plan, managed by Baltimore's T. Rowe Price Associates, fell in the rankings because it offers only one age-based portfolio for students enrolled in college. And that option can be too aggressive for some investors, says Greg Brown, author of the study.
College savings plans, often called 529 plans, try to make investing easy by offering age-based portfolios. You simply choose a portfolio based on the year nearest to when your child is expected to enter college. The portfolio will be aggressively invested in stocks when the child is young and automatically switch to a more conservative bond-laden portfolio as college approaches.
But last year's stock market plunge caught some families by surprise. As it turns out, plans' definition of "conservative" can vary widely. If you don't know exactly what's in the portfolio you chose, you might hold a lot more in stocks than you want, especially if college is right around the corner.
That was part of the focus in this year's Morningstar survey.
Of course, there is no agreement on the perfect combination of stocks, bonds and cash, Morningstar says. But one investment choice under Utah's age-based portfolio for college students held as much as 65 percent in stocks. "That is dangerously bold, in our opinion," the study said.
Utah still made the list as one of the top plans because it gave investors four other, less aggressive choices for students enrolled in college, Brown says.
Many other plans also offer a conservative, moderate and aggressive portfolio for each age group, Brown says. That way families can choose a portfolio geared toward their risk tolerance, not just by the age of the child.
Maryland's college-age portfolio isn't highly aggressive, but investors have only one choice. That portfolio for college students aims to hold 20 percent in stock, 40 percent in bonds and 40 percent in conservative fixed-income investments. That portfolio lost 8.35 percent last year.
"For a good number [of investors], that 20 percent [in stocks while] in college can be too aggressive," Brown says.
Despite its drop in the rankings, though, Maryland's plan overall remains "very solid," he says.
Maryland maintains stock in its portfolio for students in college to provide growth during the four years of schooling, says Lauren Shipley, spokeswoman for the College Savings Plans of Maryland, which oversees the plan.
Given the recent market volatility, though, plan officials will consider in June whether to add a more conservative option, she says.
Twenty percent in stocks while a student is in college and drawing down on the account seems high to me. The standard advice is not to invest money in the stock market that you will need within five years. Why should college be any different?
It would be a good move to offer a more conservative option.
Meanwhile, if your child is in or on the cusp of college and a 20 percent exposure to stocks seems risky to you, too, you do have another option under Maryland's plan now.
You can shift all or some of your money out of the age-based portfolio and into one of the conservative portfolio options that are not tied to a child's age. The plan's short-term bond portfolio, for example, gained 0.89 percent last year. That's risk you can probably stomach at this stage.
best and worst
Morningstar ranks the five best and worst college savings plans in the country each year. This year's rankings:
Ohio CollegeAdvantage 529 Savings Plan
Indiana CollegeChoice 529 Direct Savings Plan
Utah Educational Savings Plan Trust
Virginia Education Savings Trust
Virginia CollegeAmerica 529 Savings Plan
Nebraska State Farm College Savings Plan
New Jersey Best 529 College Savings Plan
Montana Pacific Life Funds 529
Ohio Putnam CollegeAdvantage
Nebraska AIM College Savings Plan