Collective Funds Next Trend in Plan Investments

The report, “Collective Funds: Description, Oversight, Features & Trends,’ points out that operational enhancements and lower expenses of collective funds makes them the new contender for the throne. One of the most significant enhancements to collective fund operations has been the development of funds that are valued and liquid daily, the paper says.

Operational enhancements, such as the availability of regular provider statements, voice response services, provider and plan Web sites, also have made portfolio information more accessible to investors. Further, the movement of traditional fund evaluation services, such as Morningstar and Lipper, to include information on collective trusts, make it easier for sponsors to offer such funds.

Equally important to the growth in collective fund usage, the paper says was the expansion in the capabilities of National Securities Clearing Corporation’s (NSCC) Fund/SERV platform in 2000 to include collective fund transactions, allowing plan participants, sponsors, and providers to complete collective fund transactions with the same ease as mutual funds.

The paper pointed out that the relatively lower expenses commonly associated with collective funds also makes them more attractive investment choices. Collective funds often have lower operational expenses than mutual funds, and the start-up costs associated with collective funds typically are lower in relation to other structures.

The paper noted that even a relatively small reduction in investment fees can meaningfully reduce the overall expenses of a plan and can cause the income replacement ratios of 401(k) assets to be significantly higher for participants.

In addition, according to the report, plan sponsors find that:

• Collective funds typically do not have trading restrictions that are as onerous or difficult to monitor as mutual funds,
• Collective funds often do not have redemption fees, and
• Rule 22c-2 doesn’t apply to collective funds.

Collective Cons

“Collective Funds: Description, Oversight, Features & Trends’ noted that, along with the benefits often found in collective funds, there are some limitations, including:

• Collective funds are not always less expensive than other vehicles,
• Performance is not listed in newspapers and advertising is more limited than with mutual funds,
• Collective funds can accept qualified plan as­sets only, preventing investment by several investor types and also preventing collective funds to retain IRA rollover assets, and
• At present the universe of products that are offered in a collective fund format is much smaller than the available universe of mutual funds.

However, the report noted there are many signs of the widespread and growing use of collective funds in the financial services industry, particularly as a pop­ular investment choice in DC plans. Therefore, DTCC expects that this will equate to a significant increase in the number of collective funds it processes over the next few years.

The rapidly increasing use of asset-allocation funds is likely to result in a further increase in the use of collective funds, according to the authors. The paper said collective funds are an excellent vehicle to house asset-allocation funds for the same reasons they are dethroning mutual funds as the king of plan investment options.