Why Advisors are Taking a New Look at Collective Investment Trusts

As many institutional investment advisors know, Collective Investment Trusts have been in existence since the 1970s.

Yet today’s collective funds are becoming increasingly popular as plan sponsors and institutional investment advisors seek more efficient ways to provide plan participants with high quality/low cost investment options.

What Has Changed

There are two reasons for collective funds growing popularity. First, the industry has eliminated many operational impediments that made collective fund performance difficult to monitor. Second, collective funds can now be traded via the NSCC and offer share class structures similar to those of mutual funds, yet at a typically lower cost.

This increase in share class structures provides advisors with considerable versatility. Some institutions offering collective investment funds to their clients, have seen an increased interest in risk based model portfolios, target date and index funds. This increased interest in these asset classes could be due to the following three key factors:

• Potentially Lower Fees -- Net expenses of index, risk-based and target-date funds have all trended lower for collective funds than for their mutual fund counterparts.

• No Minimums -- A number of collective funds require no minimum initial investments from plans. This can be conducive to a wider application of the funds across an advisor’s book of business.

• Potentially Lower Cost to Participants -- Using collective fund structures to manage model portfolios has allowed many plan sponsors and advisors to drive down asset management costs to their participants.

Why Expenses are Typically Lower

A major reason for the typically lower expenses of collective funds is that individual investors cannot invest in these products. As such, their costs are often well below those of mutual funds, due to their less stringent reporting and administrative requirements.

This provides plan sponsors and their investment advisors an opportunity to use a structure that is dedicated to the retirement plan marketplace, with funds selected to meet the unique needs of such plans.

Of course, collective fund portfolio managers need to account for daily liquidity for participant withdrawals or plan sponsor liquidations. However they do not have to plan for retail and hedge fund investor behavior.

Collective funds investors are limited to defined contribution, defined benefit and government 401(a) and 457 retirement plans.  Collective Investment Trusts are maintained by bank trust companies and maintain an exemption from the 40’s act under section 3(c)11.

Summary

Collective Investment Trusts are viable investment options to mutual funds, with collective funds typically providing significant cost savings. However, the decision to use a Collective Investment Trust or mutual fund should be decided on a case-by-case basis.

Ultimately the decision to use mutual funds, collective funds, or both, resides with plan sponsors and institutional investment advisors. However, knowledge of collective funds as an alternative to mutual funds can in the right situation produce measurable benefits.

This article was written by Wilmington Trust and published in RPAG’s Spring Summit Magazine, Impact. Minor edits were made for compatibility purposes.

401(k) Advisors (c) 2014. All rights reserved. 401k-2014-136