Where to stash college savings

Underlying funds: The bread and butter

A cheap 529 plan with a reasonable asset allocation can still disappoint if it isn't filled with good underlying funds. And though some 529 plans are chock-full of worthwhile offerings, there are plenty with the lackluster variety -- and lots of dogs, too.

So how do you determine whether your state is offering you best-of-breed or runners-up?

For starters, investigate manager skill at the mutual funds. If the management team has proved itself in many different market environments, it makes sense to have more confidence in the fund. Also, look for sensible strategies. Given that the key is a well-diversified portfolio that can handle the market's fits and starts, you'll want to see most funds offering broad market exposure to major asset classes, instead of lots of specialty options that won't play a major role in your portfolio. And, of course, low-priced funds are critical.

Taken together, good management, prudent strategies and low fees can have a big impact on your portfolio's return.

Don't forget

Everyone's financial situation is different, so be sure to carefully consider your tax situation and college-saving goals before making your decision. And if you're curious how the 529 competition stacks up, check out the best and worst 529 plans from 2009.

This article was reported and written by Marta Norton for Morningstar.

Updated May 20, 2009

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