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New 5-Cap Ratings just released

Posted: 2009-06-05

In a continuing effort to give parents, students and other college savers the information they need to make their college dreams financially possible, has just released updated 5-Cap Ratings on 529 plans across the country.

See 5-Cap Ratings chart here

The latest ratings show 529 plans as a whole becoming more flexible and shedding investor-unfriendly fees. The state-run programs are moving toward operating more like mutual funds, with daily pricing and the ability to establish accounts, disperse funds and change account information online. The programs are also working to minimize college costs by investing in low-cost index funds and eliminating excessive account maintenance fees.

Prepaid plans, which allow parents to pay future tuition costs in full at today's prices, haven't fared as well. Losses in the stock market, combined with rising college tuitions, have undermined the ability of plans in many states to keep pace with their obligations to students. Many have stopped accepting new applications, diminishing college savings choices in those states.

Still, even with these challenges, 529 plans aren't going away. Moreover, while many 529s are adopting more consumer-friendly practices, key differences remain in investment performance, matching grants and fees, and 5-Cap Ratings are designed to measure these differences. Here are answers to some frequently asked questions about how the rating system works.

How can the ratings help me select a 529 plan?'s 5-Cap Rating is a simple-to-use visual rating system that lets you quickly compare different plans just by glancing at how many graduation cap icons appear next to the plan's name. If you have identified plans you are interested in, these ratings can help you narrow down your choices.

Plans with a 5-Cap rating are those we believe are the most flexible; demonstrate excellent performance and value; offer special incentives (such as state tax deductions); and have no significant weaknesses or restrictions. A 4-Cap rating means the plan may not be at the top of every category, but it remains a solid choice for most investors. A 3-Cap plan can still perform well, but you should be aware of limitations and concerns. A 2-Cap plan usually works best only for a specific type of investor, so make sure that is you. Finally, a 1-Cap plan has many limitations that make it uncompetitive against other available investment options, according to's criteria.

Should I rely on the 5-Cap Rating alone?

You should know that the ratings represent's opinions and do not necessarily reflect your own preferences and circumstances. You should not rely on a plan's 5-Cap Rating as the sole basis for your selection of a 529 plan. Instead, you should perform your own investigation and thoroughly read and understand a 529 plan's official disclosure statement before investing in the plan. Research the details of individual plans at You can compare plans side by side using's Compare 529 Plans tool.

Does use a fixed formula to determine a plan's rating?

No. It would be virtually impossible to consider and numerically weigh every difference among 529 plans using a fixed formula. A plan's 5-Cap Rating represents's judgment of the overall usefulness of the plan, based on key criteria. Some of's other plan comparison tools, such as the 529 Plan Performance Rankings and the 529 Fee Study, do use a fixed algorithm.

What factors do you look at to determine the ratings?

The criteria uses to assign a 5-Cap Rating are spelled out on the Web site. It's useful to note that a plan's rating is influenced by plans in other states with the same or similar investments. For example, if State A and State B offer the same investment options with the same underlying mutual funds but State B charges higher fees, the 5-Cap Rating for State B will generally be lower than State A.

Why are there separate "resident" and "nonresident" ratings?

A few states operate resident-only 529 plans. Although most 529 plans are open to residents of any state, a number of those states provide their residents with special benefits for using the in-state 529 plan, such as a state income tax deduction for contributions or a break on account fees. In viewing the ratings, you should focus on the resident rating for the plans in your state and on the nonresident rating for every other plan.

How often are the ratings updated? strives to update the ratings on a quarterly basis, usually upon completion of the 529 Plan Performance Rankings. However, a plan's 5-Cap Rating can change at any time and without warning. That happens often after a plan undergoes a significant change (i.e., a change in plan manager).

How much weight is given to a plan's historical investment performance?

With the relatively recent introduction of the 529 Plan Performance Rankings, now can consider historical investment performance in assigning ratings. This is appropriate for a couple of reasons. First, as 529 plans start to look more alike, there are fewer points of differentiation compared with a few years ago, and investment performance fills that void.

Second, users' primary goal is to find the 529 plan that provides them with the best return along with the fewest risks, and investment performance is a key factor. But remember: Past performance is not a guarantee of future returns, and many 529 plans have relatively short performance histories.

If I see an adviser-sold 529 plan with a higher rating than a direct-sold 529 plan, does this mean you believe the adviser-sold plan is better?

Not necessarily. Adviser-sold 529 plans generally have sales charges and other costs not found in direct-sold 529 plans. Your decision to use an adviser-sold plan should be based on your desire to work with an investment professional to make investment decisions. You must be willing to pay the higher cost associated with the services of the professional and his or her firm. For this reason, the 5-Cap Rating for every adviser-sold 529 plan is flagged with the label "Adviser Sold."

Why do I sometimes see "NP" (means "new plan") for a plan that has been operating for months? does not assign the 5-Cap Rating immediately when a new plan comes online, in order to see that the plan can deliver what it promises and that no major problems become apparent. It may be several months before the rating is assigned.

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