“Auto-pilot” can be a good thing in personal finance. It can ensure you continue saving and investing at a particular pace and remove emotion that might cause you to deviate unnecessarily from a good personal-finance plan.

But it can also translate to “asleep at the wheel.”

Last week, Morningstar came out with its annual review of 529 plans in the U.S.: The Best and Worst 529 College-Savings Plans. You can read more about the list at that link; and this has also already been discussed generally in other personal-finance blogs. (Check out Morningstar’s Best and Worst 529 College Savings Plans (at The Sun’s Financial Diary) and Morningstar’s Best and Worst 529 Plans (at All Financial Matters).)

The five best plans were given as:

• Illinois Bright Start College Savings Program
• Maryland College Inv. Plan
• Virginia CollegeAmerica (broker-sold)
• Virginia Education Savings Trust
• Colorado Scholars Choice College Savings Program (broker-sold)

The five worst plans were given as:

• Ohio Putnam CollegeAdvantage (broker-sold)
• Mississippi Affordable College Savings Program
• Mississippi Affordable College Savings Program (broker-sold)
• New York 529 College Savings Program
• Nebraska AIM College Savings Program (broker-sold)

Wait a minute—that’s our plan! New York 529 College Savings Program!! What the….? We've been contributing to it monthly—on auto-pilot—for years now!

So let me back up. When we selected our 529 plan, we actually did some research. Admittedly, it was mostly on SavingForCollege.com, which had been recommended by several sources as the place to go for researching 529 plans. (There are probably more resources available now than there were then.)

At that time, the New York 529 plan—sold direct, rather than through a broker—was the best or tied for the best rating among direct-sold plans available to us. I can’t remember if it had 4½ stars or what it was (out of 5), but I distinctly remember that no one was rated better among plans we could consider. And it was (and is) using Vanguard index funds, so I was comfortable with the name and reputation for low costs.

But JLP of All Financial Matters had this to say in his recent post on the Morningstar ratings:

As a side note, while putting his post together I decided to check out Saving for College’s 5-Cap ratings for each of these plans. One thing that troubles me is NEARLY EVERY PLAN has an above average 5-Cap rating (the ratings are lower for out-of-state residents). I realize that rating these plans is somewhat subjective. However, it seems as though Saving for College may be a little too generous with their ratings, which almost makes them worthless. I would only use Saving for College as a starting point for 529 plan research.

Ah, advice too late for me.

Anyway, what the heck happened in the several years since we selected the New York 529 plan?

Interested and perturbed, I wanted to see how long I may have been asleep at the wheel. So I checked Morningstar’s 2007 ratings, and I found that the New York 529 plan was not among the five worst in last year’s rankings. This made me feel a little better. Not much, but a little.

Turning back to the here and now, the SavingForCollege.com rating of the plan is down to 3 stars. SavingForCollege.com reports the program management fees as “0.55% manager fee; fee includes underlying fund expenses” and lists, “Total asset-based expense ratio: 0.55%”.

And Morningstar’s comments for 2008 are:

We're bothered by New York's 529 College Savings Program's lack of diversification. The direct-sold plan is moderately priced and relies on solid Vanguard index funds, but it doesn't provide investors with any international exposure. Not only does that mean that the plan is missing the gains made in foreign markets, it also has no buffer when the U.S. market turns down.

Well, this is as close as it comes to good news. I knew that costs were a big criteria for Morningstar—and the other four plans selected for the five worst were lambasted exactly for high costs. I was afraid I’d find that the New York 529 costs had somehow gone sky-high during my apparent inattention.

But the New York 529 plan’s weakness in its lack of international exposure in may be something we can manage around. For instance, we could increase exposure to international in our investments outside of the 529 plan (though they would not have the advantages of being inside the 529 plan). And we could of course change plans—though I am guessing that would mean a fair amount of hassle. If we were in one of the other four worst plans—with their high costs—I think we probably would move, pronto. We’ll have to look at this more closely.

In any event, we’ve learned our lesson... we need to check in on our auto-pilot investments more often!

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