Collective Trusts 101

Collective trust funds, also called collective investment trusts, represent an alternative investment vehicle to mutual funds for qualified retirement plan investment options. Both are investment vehicles comprised of pooled assets invested in securities according to a pre-determined strategy to meet a specified objective.

What are collective trust funds?

Collective trust funds or collective investment trusts are defined by who regulates the investments, who is able to offer them, who they can be offered to and their registration exemption status.

Who can offer them?
Collective trust products are sponsored and maintained by a bank trust department or a trust company.

Who regulates them? 
The primary regulator for collective trusts is the Department of Treasury / Office of the Comptroller of the Currency (OCC) pursuant to OCC Regulation 9.18 rather than the Securities and Exchange Commission (SEC). The Department of Labor also has oversight for the funds through its oversight of ERISA Plans.

Registration Exemption
The key difference between collective trusts and mutual funds is that collective trusts are exempt from the investment company registration requirements of the Investment Company Act of 1940 and the securities registration requirements of the Securities Act of 1933. These exemptions are available because collective trust funds are not available to the general public. They can only be offered by a bank to certain qualified employee retirement plans. The reasoning is that qualified plans do not require the protection of registration because individual investors / plan participants are already protected through other fiduciaries. In addition to the trustee for the collective trust funds who acts as fiduciary for all fund investors, individual plan participants investing in the funds are also protected by an independent plan fiduciary, usually the plan sponsor.

Eligibility: Who can invest?

As previously noted, collective trust funds are only available to investors in qualified retirement plans. Qualified retirement plans include any and all employee benefit plans as defined under section 401(a) of the Internal Revenue Code, certain governmental plans and insurance separate accounts consisting solely of assets in qualified retirement plans. This includes the following defined contribution and defined benefit plans:
 

Defined Contribution

  • 401(k) Plans
  • Profit Sharing Plans
  • Stock Bonus Plans
  • Thrift Plans
  • Money Purchase Plans
  • Target Benefit Plans
  • Taft-Hartley Plans

Defined Benefit

  • Pension Plans
  • 457 Plans
  • Cash Balance Plans
  • Master Trusts
  • Insurance Separate Accounts
  • Taft-Hartley Plans
Examples of Ineligible Investors include health and welfare plans, IRAs and 403(b) plans.

Suitability: Who are collective trust funds best suited for?

Collective trust funds are best suited for retirement plans that are too large to use a mutual fund but do not have the assets to support a large institutional separate account fee, custody bill and unitization services. They are also suitable for retirement plans that may have the size to support an institutional separate account but do not wish to assume the burden that comes with ownership of securities in a fund such as foreign sub TA fees and ISDA filings. Because collective trust funds do not have the same restrictions as mutual funds have on investing in alternatives or derivatives, they are well suited to plans seeking exposure to pure alternative investment markets such as commodities, real estate, bank loans or absolute return strategies.

Key Differences to be aware of

In addition to their availability being limited to retirement plans, there are a few basic differences between collective trust funds and other vehicles such as mutual funds to be aware of.

Since collective trusts are not registered investment companies (mutual funds), they do not produce a prospectus. Instead, the governing document of a collective trust is its Declaration of Trust. Each plan sponsor receives a copy of the Declaration of Trust upon their initial investment into the Institutional Retirement Trust collective trust funds.

Operating Expenses

Fund operating expenses such as audit, custody, fund accounting, and transfer agency fees are accrued and deducted daily from the total fund assets prior to striking the daily net asset value (NAV) for the fund and prior to calculating performance. Fund operating expenses are expressed as a ratio of total assets. The most recent audited expense ratios for the Invesco Collective Trust Funds can be found in the annual report. Quarterly unaudited expense ratios can be found on the quarterly Fund Overviews / Fact Sheets. The expenses on the funds are generally lower than those for mutual funds and decrease as fund assets grow.

Management Fees

One of the more well-known features of collective trust funds is their ability to charge negotiable fees to their clients. The Invesco Collective Trust Funds offer this type of pricing flexibility to clients for most funds in the Class C shares of a given fund.

The Invesco Collective Trust Funds Class C share class investments charge according to an asset-based fee structure allowing clients with greater assets invested to pay a lower fee through consecutive breakpoints. Management fees are specific to each account. They accrue daily based on the account's market value and are redeemed from the account monthly. Management Fees cover the administrative services provided by the Trust Company, the sub-advisor to the fund and the marketing costs assumed by the distribution channels selling the funds. They may also include revenue sharing fees for plan administration expenses.

All other share classes offered have a fixed management fee charged to all investing plans that may or may not include fixed revenue share fees. These share classes function identically to mutual funds in that all fees and expenses are deducted from the fund prior to striking the daily net asset value.

Collective trust funds are exempt from taxation under IRS Revenue Ruling 2011-1 since they can only be purchased by certain qualified retirement plans such as 401(K) and defined benefit plans.

Because collective trust funds are only available as retirement plan investments, they do not pay out dividends or capital gains. All income and earnings from the sale of securities are reinvested back into the fund with a resulting increase/decrease in share price. In other words, any profit or loss to the fund is reflected in the daily share price. The exception to this are stable value trusts. In order to maintain a daily share price of $1 per share, all dividends for these funds accrue daily and are reinvested back into investor accounts on the last business day of each month as dividends.

The Invesco Collective Trust Funds Class C share class investments represent our flexible pricing product offerings where each investing plan can have its own custom fee schedule. For this reason, net asset values (NAV) and performance for Class C shares of any Invesco Collective Trust Fund is calculated differently from that of mutual funds.

Since the management fees are different for each plan, those fees must be charged outside of the daily NAV. Therefore, the NAV of a Class C collective trust fund does not reflect the deduction of investment management fees, although it does include fund expenses.

Returns for Class C shares are calculated both gross of fees or standard net of fees. Gross of fees fund performance is calculated before the deduction of management fees but after the deduction of fund operating expenses. Standard net of fees fund performance is calculated after the deduction of fund operating expenses and after the deduction of the standard investment management fee applicable to the fund. Individual Plan performance will vary depending upon the timing of contributions and withdrawals and upon the individual Plan's fee schedule. The monthly-adjusted returns are compounded and then annualized to compute the long-term returns.

Net of fees returns, as provided by the Trust Company for a fund's Class C shares, are net of our standard management fee, which does not include any client service fees and may not be the actual fee paid by the Plan. The actual investment management fee varies for each Plan based on the fee negotiated with the Plan. This negotiated fee can fluctuate daily based on the various asset level breakpoints reached at the time the daily fee accrual is calculated for each Plan.

Note, however, that any share class other than Class C within the Invesco Collective Trust Funds has a fixed management fee and therefore the daily NAVs and net performance do reflect the deduction of the management fees for that class of shares for all investors.

Comparison to Other Vehicles

Unlike mutual funds, collective trust funds are exempt from the SEC investment company registration requirements. Collective trust funds are therefore not subject to the same fund registration fees and expenses as mutual funds, such as the requirement to produce a prospectus. They do not charge 12b-1 fees, or any type of fees in connection to the purchase or sales of units of the funds.

In order to qualify for this exemption, collective trust funds are only available for investment within a qualified retirement plan such as a 401(k) plan or pension plan. Since they are not available to the general public, they are not advertised.

Because collective trust fund investors are all institutional retirement plans, the trust funds generally keep much lower cash balances than retail mutual funds since retirement plan participants usually leave their money where it is longer and tolerate market fluctuations better than retail investors. At the same time retirement plan cash flows tend to be rather predictable consisting mostly of regularly scheduled contributions, withdrawals and rebalance activity. This allows collective trust portfolio managers to reduce cash flow volatility because they do not have to raise cash to meet redemptions as often and can typically predict their cash flow needs in advance. Since cash balances are generally very low, more of an investor's contributions remain fully invested in the market rather than diluting performance remaining as uninvested cash in the fund.

There is no prospectus or statement of additional information for the Institutional Retirement Trust collective trust funds. Instead, the offering documents for the funds is the Declaration of Trust, which contains a description of each of the funds and the provisions governing their operation. Each investing plan executes a standard Participation Agreement prior to investing in which the plan represents that it is eligible to invest in the collective trust. The Participation Agreement also contains the fee schedule for the plan's fund investments.

1 Investment objectives and needs vary from one client to the net. Some clients' needs can best be met through investment in a mutual fund, while other clients will best be served by investing in a collective trust fund. The information contained here is intended to illustrate the differences between the two investment vehicles so that an informed choice can be made as to which option will best serve your investment objectives. None of this information should be construed as an offer to buy or sell any financial instruments. As with all investments there are associated inherent risks. Please obtain and review all financial material carefully before investing.