5-Cap Ratings Criteria
The 5-Cap Ratings represent our opinion of the attractiveness of each 529 plan, relative to all other 529 plans, based on the many factors that we feel are important.
Before establishing a 529 account and making contributions, we strongly recommend that you read and understand all enrollment materials and official disclosures from that 529 plan.
Resident Ratings versus Non-Resident Ratings
Separate ratings are presented because many states offer special incentives or benefits to their state residents who invest in their 529 plans. Please refer to the official program disclosures to determine who qualifies for a "resident" account. You may not live in a state but still qualify for a resident account when, for example, your beneficiary lives in the state or perhaps because you work in the state.
What the ratings mean
This is a program that offers outstanding flexibility, attractive investments, and additional economic benefits (such as generous state tax incentives) that for some people, at least, will provide a substantial boost to their savings. There are few, if any, weaknesses noted in the program.
An excellent program with many benefits for the participant and positive investment attributes. If it has any significant weaknesses then it also has some particularly good things to recommend it.
A very good program that offers valuable benefits but may have some limitations or concerns that investors need to know.
A program that will work for many people who fit the "target" profile but contains potentially significant problems or uncertainties that can hurt the unsuspecting investor.
A program that contains too many unnecessary restrictions, uncertainties, investment downsides, or other problems so that changes are necessary (in our opinion) for the program to compete effectively against other alternatives.
Another similar program is offered in this state that is more appropriate in all cases.
This is a recent program and does not yet have a 5-Cap Rating assigned.
This program is not rated because it is not open to new investors or it does not offer market-based investment portfolios (e.g., it is a prepaid tuition plan or it is a 529 plan that only offers FDIC-insured savings options). The lack of a rating should not be construed as a negative.
Scoring and weighting
The many factors we examine and score for each 529 plan are grouped into four categories: Performance, Costs, Features, and Reliability. A plan's category scores are computed on a scale of 1 to 5 and carried out to two decimal places, and displayed on the Plan Details page alongside the 5-Cap Rating. In addition, we assign a "Resident Upgrade" score to reflect additional benefits provided by the 529 plan to residents of the sponsoring state.
The category scores and Resident Upgrade are used to compute the plan's overall 5-Cap Rating, using an averaging algorithm.
It is important to note that any particular individual would likely weight these factors, and the four categories, differently based on his or her own circumstances and preferences. For example, some investors might place more weight on historical investment performance than we do, while others might place less weight on it.
A note about direct-sold versus advisor-sold plans:
5-Cap Ratings for advisor-sold 529 plans assume that the higher cost structure of the typical advisor-sold plan is justified by the value of the professional advice and due diligence provided by the financial advisor, as well as by the time savings to you. If you do not need the services of a financial professional, or if your own financial advisor cannot deliver value-added 529 services, you may wish to limit your consideration to the direct-sold 529 plans offering a lower cost structure. The 5-Cap Ratings indicate which 529 plans are advisor-sold.
529 SAVINGS PLANS
Here is a brief description of the categories and some of the factors we use in assigning a 5-Cap Rating to the 529 savings plans:
Each plan's performance score is developed directly from Savingforcollege.com's Quarterly 529 Performance Rankings. A 529 savings plan must have at least one year of performance history before they will be assigned a 5-cap rating. For those plans that are not part of our quarterly performance rankings, such as plans offering a single set of bank-based investment options, we assign a performance score by evaluating the returns currently available on similar types of investments outside of 529 plans.
We compare the total average asset-based expense ratio of the plan to other 529 savings plans. We also compare the asset-based expense attributable to program manager and administrator fees, because these represent the additional costs of using the 529 plan over and above the costs of investing directly in the plan's underlying investments. We also adjust for plans that charge on enrollment fee and/or annual account management fee. For advisor-sold plans, we compare the sales loads on the "A" share class. And we also penalize plans offering a menu of investment options that you can find in a different 529 plan but at a lower cost.
How "state-of-the-art" is this 529 plan? What extra features does it provide for the benefit of its participants? Among the features we look for are investment menus covering the full range of investor risk; the ability of the plan to hire and fire investment managers or replace their underlying mutual funds; creditor protection under the sponsoring state's laws; FDIC-insured options; purchase rewards programs; other participant perks; and minimum and maximum contribution restrictions.
No one likes unpleasant surprises, and here we look for the warning signs. We assign a rating to the 529 plans based on many considerations including industry experience of the outside program managers; plan popularity; risk of plan upheaval; quality of program disclosures and other materials; state due diligence practices; investment reporting; flexibility to make account changes; withdrawal restrictions; and rollover procedures.
The Resident 5-Cap Rating may be higher than the Non-Resident 5-Cap Rating if the 529 plan or the state offering it provides special benefits to residents of the state. These benefits might consist of a state tax deduction or credit for contributions to the plan that are not available for contributions to an out-of-state 529 plan; a matching contribution program; a break on fees and expenses; an advantage in computing eligibility for state-funded financial aid programs; or any other potentially valuable advantage.
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