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.
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.
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.
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.