The first place California residents should look for a college savings plan is the state's own 529.
California revamped its ScholarShare program last month, bringing in a new company to oversee it, overhauling the investment options and lowering the fees.
Here's a look at the pros and cons of the ScholarShare plan for California residents.
Q: What are the basics of the ScholarShare 529?
A: The program offers 19 investment "portfolios," including age-based accounts and multi-fund options based on how much risk parents are willing to take in pursuit of outsized returns. The fees range from 0.18% to 0.62%. The plan is managed by TIAA-CREF, a large New York investment firm, which replaced Fidelity Investments in November.
Q: How does California's 529 compare with those of other states?
A: California's plan gets generally high marks from experts, who say it has reasonable fees and solid investment options. Fund-rating firm Morningstar Inc. ranks it "above average."
Still, six states got higher grades from Morningstar, including a Vanguard-run plan in Nevada and two plans offered by T. Rowe Price. The rankings can be found by searching the Internet for "Morningstar 529." California's plan is "not the industry's best, but it's very good," Morningstar analyst Laura Lutton said.
Q: So should I use California's plan?
A: That depends, in part because there is neither a tax incentive to use it, nor a tax hit for using another state's plan.
Unlike most other states, California does not offer an upfront tax deduction for 529 contributions. It's one of only six states with a state income tax that do not give a tax benefit for putting money in a 529, according to Financial Research Corp. And California does not tax the investment gains of families who use other states' 529 plans, said Joe DeAnda, a spokesman for the California treasurer's office, which oversees ScholarShare.
Still, there's no tax incentive for California residents to go elsewhere, DeAnda said.
"If you live here, you're not going to get a state tax deduction by going to any other state's plan, so then you come back to the other elements of the plan and we feel we're hard to beat there," DeAnda said.
Q: Is it worth it for existing ScholarShare investors to switch to a competing 529 plan?
A: Probably not, said Morningstar's Lutton.
"You're getting a better plan under TIAA-CREF than you got under Fidelity, so it certainly makes sense to stay put," she said.
Q: What else should I know about California's 529?
A: For parents using age-based funds, pay close attention to how much is invested in stocks.
There is disagreement in the 529 industry about whether the plans should have any money in stocks as students near college age. Some experts say all the money should be in safe investments.
Others argue that some portion should remain in equities to help families keep up with rising college costs over four (or more) years.
The ScholarShare plan tilts toward the latter. For a 17-year-old student, for example, the passively managed age-based account would keep almost 19% of the portfolio in stocks.
"We feel like the objective of these plans is to get a return that is at least equivalent to the cost of attending college," said Doug Chittenden, head of TIAA-CREF's 529 business. "To get there you have to have a fairly aggressive investment strategy."
There's plenty of logic in that thinking. But parents should consider switching to the guaranteed Principle Plus Interest portfolio if they want complete safety of principle.