Is your state's 529 college savings plan on the "best" list or the "worst"? The results can be found in Morningstar's sixth annual study of 529 plans.

"2008 was a terrible year for 529 plan investors," said Greg Brown, Morningstar mutual fund analyst and author of the study. "In recent years, the industry made strides by lowering fees, improving investment options, and closing down poorly structured plans. Last year, however, we saw too many plans that were overly aggressive with their investment strategies as students approached college, and plans that stayed loyal to strategies that just weren`t working."

Morningstar`s annual study of 529 plans focuses on several areas: the underlying funds, expenses, diversification, asset allocation, and flexibility. Morningstar evaluates the quality of the underlying investments by looking for funds with experienced managers, a history of good stewardship, and sensible strategies. Low expenses, which Morningstar has found to be among the best predictors of a mutual fund`s long-term success, are essential. Morningstar analysts look for diversification across the major asset classes as well as an allocation between stocks, bonds, and cash that is appropriate for the students' ages. Morningstar also likes to see flexibility for investors with different needs, time horizons, and levels of risk tolerance, including age-based options with differing levels of risk and fixed-allocation offerings in which the level of stocks, bonds, and cash do not change over time.

Best 529 College Savings Plans

Name, Program Manager
Ohio CollegeAdvantage, Ohio Tuition Trust Authority
Utah Educational Savings Plan Trust, UESP Trust
Indiana CollegeChoice 529 Direct Savings Plan, Upromise Investments, Inc.
Virginia Education Savings Trust, Virginia College Savings Plan Board
Virginia CollegeAmerica 529 Savings Plan*, American Funds

*Broker-sold

Worst 529 College Savings Plans

Name, Program Manager

Ohio Putnam CollegeAdvantage*, Putnam
Nebraska AIM College Savings Plan*, Union Bank and Trust Company
Nebraska State Farm College Savings Plan*, OppenheimerFunds
New Jersey Best 529 College Savings Plan, Franklin Templeton
Montana Pacific Life Funds 529 College Savings Plan, Pacific Life Funds

*Broker-sold

Virginia's two plans, Education Savings Trust and CollegeAmerica, have now earned spots on the Best list two years in a row. Virginia Education Savings Trust is managed by the state of Virginia, rather than a fund company, which gives the plan the freedom to choose among different fund families. The fund also offers a mix of index and actively managed age-based portfolios, as well as healthy state tax breaks and low costs. Virginia CollegeAmerica returns to the Best list with its lineup of high-quality American Fund funds with broad asset class exposure and low fees.

Ohio's two plans are at opposite ends of the spectrum—its direct-sold CollegeAdvantage plan is on the Best list because of its sensible age-based options, active and index strategies, low fees, and generous tax deductions for in-state residents. Like Virginia's Education Savings Trust, the state of Ohio manages CollegeAdvantage, giving it the flexibility to create a lineup of offerings from numerous fund families. Ohio`s other plan, Putnam CollegeAdvantage, appears on the Worst list for the second year in a row. Despite lowering fees and adding non-Putnam funds to its lineup during the past year, it still relies heavily on Putnam funds, which have been hampered for several years by high manager and executive turnover and poor performance.

Longtime Morningstar favorite Utah Educational Savings Plan Trust returns to the Best list for its low costs, strong lineup of Vanguard index funds, and the flexibility offered by five age-based options that allow investors to invest according to their risk tolerance. Indiana CollegeChoice 529 Direct Savings Plan debuts on the Best list with strong underlying funds, broad asset class exposure, prudent age-based portfolios, and customization options.

Two Nebraska 529 plans appear on the Worst list this year. Nebraska AIM College Savings Plan makes its fourth appearance in a row as a result of its high fees and lack of fund options. Nebraska State Farm College Savings Plan joins the Worst list not only because plan administrators chose precisely the wrong time to invest heavily in Oppenheimer bond funds, but also because the state still hasn’t done anything to address the problem.

New Jersey Best 529 College Savings Plan is on the Worst list for several reasons, chief among them an overly aggressive age-based option that doesn’t adjust enough for students nearing college. High fees cement the plan's place on the Worst list. Montana Pacific Life Funds 529 College Savings Plan rounds out the Worst list with expensive but average underlying funds and no age-based options.

"Investors should carefully examine their options before choosing a 529 plan. For example, states usually offer tax deductions for in-state residents, but the value of that tax incentive might be outweighed by other factors. The in-state plan might have high expenses, or a poorly constructed portfolio," Brown said. "The broad disparity of 529 plan performance in 2008 illustrates how important it is for investors to do their homework before choosing a plan."

A vast majority of actively managed mutual funds have underperformed the benchmark index of domestic stocks: the S&P 500.

Again.

Over the five year market cycle from 2004 to 2008, the S&P 500 outperformed 71.9% of actively managed large cap funds, the S&P MidCap 400 outperformed 75.9% of mid cap funds, and the S&P SmallCap 600 outperformed 85.5% of small cap funds. These results are similar to that of the previous five year cycle from 1999 to 2003, according to just-released results from the Standard & Poor’s Index Versus Active Fund Scorecard (SPIVA).

"The belief that bear markets strongly favor active management is a myth," says Srikant Dash, Global Head of Research & Design at Standard & Poor’s. "A majority of active funds in each of the nine domestic equity style boxes were outperformed by indices during the down markets of 2008. The bear market of 2000 to 2002 showed similar outcomes."

SPIVA results show similar results for international equity and fixed income funds. Benchmark indices outperformed a majority of actively managed fixed income funds in all categories over a five-year horizon. Five year benchmark relative shortfall ranged from 2-3% per annum for municipal bond funds to 1-5% per annum for investment grade bond funds. Among international equity funds, indices outperformed a majority of actively managed non-U.S. equity funds over the past five years in the four categories studied, including emerging market funds.

Since we last spoke about 401(k) plans, many of you have been raising your hands with questions and comments. Let’s get to a couple of those now.

In our 7-Step Do-It-Yourself 401(k) Rescue Plan, step #6 seemed to stir quite a bit of interest. That was the one that warned about holding company stock in your 401(k).

One comment was, “Point #6 hit home, wish I would have read this two years ago.”

Well remember, it’s never too late to do the right thing. If you still hold that company stock in your 401(k) -- or in your rollover IRA -- make sure that you’ve considered diversifying it, especially if it represents 5% or more of your total holdings.

Now, don’t get me wrong. We all love the companies we work for, right? Of course we do. Until we don’t. We may think we’ve got the inside track, banking on a great employer’s rising fortunes. Until a new manager we can’t stand takes over our department. Or the company lays-off our best friend – or us. Or goes bankrupt. Whatever. The point is, there are a lot of great companies offering a lot of wonderful investment opportunities in the world. You already count on your employer for a steady paycheck and perhaps a major portion of your health benefits. Maybe you don’t want to put your entire future in their hands too.

Yes, you have a question?

“Some of us still don’t know how to get that employer-matched stock out of our 401(k) and what to do with it once we get it out.”

Good question. Every since Enron, Worldcom and a host of other companies taught us all a severe lesson on holding too much company stock in our retirement plans, you would think we would know better. But in a 2008 survey of 65 of the biggest 401(k) plans, Pensions & Investments magazine found that 26% of the assets in those plans were in company stock. In fact, at General Electric, Chevron and Duke, participants had more than half of their 401(k) assets in company stock. Yikes!

When you defer a portion of your salary into your 401(k) plan, your company may make a “matching contribution.” Hey, that’s free money! And it used to be automatic for companies to offer those matching contributions in their own stock. The Pension Protection Act changed that. Now you’ve got a choice, and employers are motivated – due to their fiduciary responsibility – to make sure you know you have a choice. Most plans now allow you to take your matching contribution in any of the investment offerings of your 401(k) plan, or allow you to immediately diversify any company stock received through that matching contribution.

So, call your 401(k) plan administrator (the phone number will be on your statement) and ask about the options you have with any matching contribution. And take a hard look at the company stock you have allocated to past, present and future allocations in your 401(k).

Oh, by the way. Have you met the new manager yet?

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Remember that job you had ten years ago, when you contributed to your very first 401(k) retirement plan? Well, that was three jobs ago, you've moved -- and the company was sold. And after all of that, you're wondering what happened to the money that you dutifully set aside. It may not have been much, but these days every little bit helps. And besides, you would like to rollover that money to an IRA so that you can get your hands on it one day.

Just such scenarios happen more than you might think. "Left behind" 401(k) plans get lost and forgotten. Statements are returned to the sender, undelivered. And meanwhile thousands and thousands of dollars are languishing in limbo.

It may be a long-shot, but if you have just such a mystery to solve, there is a Web resource worth trying. It's the National Registry of Unclaimed Retirement Benefits, a non-profit database provided by Penchecks, an independent qualified plan benefit distribution processing company. Employers can upload "lost" 401(k) assets into the system, while former plan participants can input their Social Security number in an effort to track down those very same assets.

The account balances are small -- after all, few people would forget a million dollar 401(k) -- but it might just be your money, forgotten and waiting to be found.