Commentary: North Dakota changes impact 2nd quarter performance rankings

http://www.savingforcollege.com/articles/commentary-north-dakota-changes-impact-performance-rankings-1090

Financial Professional Content

Each quarter Savingforcollege.com analyzes the investment performance figures for thousands of 529 portfolios and ranks the 529 savings plans from best to worst for one-, three-, five-, and 10-year investment performance. We rank plans that consumers can enroll in directly, as well as those sold through brokers and fee-based financial planners.

In producing our rankings, we compared the reported investment performance of a subset of portfolios from each 529 savings plan. We use a subset because plans vary greatly in their underlying investment options. We use a representative subset of options to compare plans on an apples-to-apples basis. The "performance score" determines the ranking. For more details, please view our methodology.

It is important to remember that this data represents historical performance. Past performance over any period is not a guarantee of future results.

North Dakota changes impact rankings

For the most part Savingforcollege.com rankings do not change significantly from quarter-to-quarter. However, this quarter the North Dakota plan split its portfolios into two share classes. Because these are relative rankings, changes in one plan can have a direct impact on the relative performance of their peers. For example, the transition of the DC 529 plans resulted in two of the strongest-performing plans with over 10 years of performance history being removed from the rankings. The change in plan structure for North Dakota, however, has a much greater impact on performance rankings, causing some "static" in the rankings.

North Dakota's CollegeSAVE 529 savings plan had been structured with a flat 85 basis point fee. No matter how you purchased the plan, as an investor you paid the same fee. However, advisors were also able to offer the plan and take a "Distribution Services Payment," which was capped at 30 basis points annually. This made the plan both one of the most expensive direct-sold plans, and least expensive advisor-sold plans for consumers. This was because Morgan Stanley, the prior plan administrator, had used the plan as their national advisor-sold plan, and the 30 basis point trail was a way to keep those existing advisors from heading for the exits as soon as the plan transitioned, and allow those advisors to be compensated for continuing to service and support those accounts. This fee was not tacked-on, but instead eaten by the program administrator.

The change in fee structure brings greater simplicity and transparency to the CollegeSAVE plan, splitting it into two distinct advisor-sold and direct-sold share classes. This is more easily understood, and makes it easier to compare the plans against one another. However, the performance history can only be inherited by either the advisor- or direct-sold share class. Because the advisor share class is unchanged, the existing performance history is now being attributed to those shares. Savingforcollege.com has split the plan into its two respective share classes, and will include the direct-sold performance history in a duplicate direct-sold "dummy" plan once it has established sufficient performance history.

What happened to the second quarter performance rankings?

Because performance rankings are relative, rather than absolute, when one or more portfolios does particularly well or poorly, it can impact all of the other plans relative to itself. So with seven asset categories and the respective portfolios being reassigned to the advisor-sold plan tranche, both advisor-sold plans and direct-sold plans were impacted when CollegeSAVE shifted into our advisor-sold plan rankings. Direct-sold plans moved around because their expensive peer was removed, and advisor-sold plans shifted because the relatively cheap CollegeSAVE joined their ranks.

Source: Savingforcollege.com, as of 2017-06-30

Remember, unlike the retail mutual fund industry where you have thousands upon thousands of funds and dozens of share classes, the 529 landscape is relatively small, with only 52 ranked direct-sold plans and 29 ranked advisor-sold plans ranked this last quarter. This is because plans can no longer be ranked when they have recently restructured, restarting their "performance clock." So when a 529 plan transitions to a new manager or otherwise incurs a change significant enough to remove its performance history and start anew, its peers become the new standard in performance, and shift rankings slightly for the remaining plans.

Subscribers can view the full performance rankings for each individual portfolio here.