Bright Start rated "Top 5" college savings plan in the nation

Morningstar calls improvement, low fees a "Cinderella story"

April 16, 2008

Morningstar, Inc. has named Illinois’ Bright Start College Savings Program one of the top five college savings plans in the nation, Illinois State Treasurer Alexi Giannoulias announced following the release of a report today.

Bright Start, Illinois’ tax-free 529 college savings plan, made its first appearance atop the list thanks to its “sensibly constructed” investment options and “rock-bottom” fees, according to the investment research company’s annual ranking of the nation’s top programs.

In the past, Morningstar had routinely criticized Bright Start for its high structural costs and tax penalties. Savingforcollege.com, an independent authority that analyzes college savings programs, had ranked Illinois’ Bright Start program 47th out of 48 plans nationwide due to high costs, underperforming funds and lackluster investment options.

After taking office, Giannoulias overhauled Bright Start, selecting OppenheimerFunds Inc., through a competitive bid process to manage the program starting last July. Oppenheimer significantly reduced the costs of Bright Start, making it among the lowest-cost programs in the nation, and offered better investment options to gain a higher rate of return.

“Morningstar called Illinois a ‘Cinderella story,’ and I couldn’t agree more,” said Giannoulias of the $2.3 billion program that has more than 160,000 account holders. “We’ve transformed from one of the worst programs to one of the best programs in the nation in under a year thanks to our efforts to make Bright Start the smartest way for families to save for college.”

In reporting the Morningstar rankings, The Wall Street Journal noted that Bright Start achieved the top-tier status by “replacing its program manager and shaking up its lackluster investment lineup with higher rated funds and rock-bottom expenses.”

Tax-advantaged 529 plans are one of the most popular college-savings vehicles for parents because earnings on accounts are tax exempt as long as the accounts are spent on higher education costs at an accredited school. The investment accounts typically include a wide range of mutual funds.

Most states offer in-state residents additional tax breaks. Illinois families who invest in Bright Start can deduct up to $10,000 per parent from their income taxes.

In ranking each state’s plan, Morningstar assessed the "building blocks" of each one, including access to a diversified lineup of low-cost funds and the flexibility to make adjustments to their investment strategies. The quality of the underlying funds and program-management fees were also key factors.

Morningstar said Bright Start previously offered a "middling and an unimpressive lineup" of mainly Legg Mason funds. Today, the plan allows participants to choose between low-cost Vanguard index-fund portfolios and actively managed age-based portfolios, which become a more conservative mix of stocks and bonds as the child gets closer to college age.

Bright Start participants have the potential to earn more than other plan’s investors because they pay small fees of 0.20% to 0.23% for index portfolios and 0.38% to 0.63% for actively managed portfolios. Under Legg Mason, Bright Start participants were required to pay a flat annual fee of 0.99% and did not have the option of selecting index funds.

“High expenses can siphon off returns and ultimately eat away at financial gains that would have gone toward tuition,” Giannoulias said.

Morningstar had also been critical of Illinois, arguing the state “earned poor marks” for imposing a 3 percent tax penalty on families who invest in out-of-state college savings plans. Along with Alabama, Illinois was the only other state to impose such a penalty.

Giannoulias introduced legislation that was signed into law last summer that eliminated the penalty, noting the state should not punish Illinoisans simply because they had sought a more profitable plan out of state.

“With recent news of the costs of college skyrocketing, Bright Start gives families saving for their children’s higher education a smart low-cost option,” Giannoulias said.

The Morningstar report can be viewed online by visiting www.morningstar.com.