Collective Trusts: 5 Things to Consider
Working with a sponsor who wants to switch out some mutual funds for collective trusts?
Reported by Judy Ward
1. Lower fees will likely result. Reducing fees largely drives sponsors’ interest in collective trusts, says Ben Jones, director of defined contribution (DC) at Russell Investments. The fee differential with mutual funds varies, he says. “Some of the collective vehicles are significantly different than the mutual fund equivalent form the same company, so it Is not a straight, across-the-board fee cut. If plan sponsors are going to move to collective trusts, they usually want to see a multi-basis-point discount, seven to 10 basis points.”
If a plan moves into a previously existing collective trust, the sponsor is prevented from negotiating fees individually. “Typically, they have a set fee schedule,” says Benjamin Taylor, vice president and consultant at Callan Associates. But they often have asset-based “break points” similar to mutual funds’ share classes. Still, if a sponsor has a customized collective trust put together for a specific plan, the fees are negotiable, he adds.
2. Asset size influences access. Vustomized collective trusts and separately managed accounts are still mainly the choice of large plans with more than $1 billion in assets, says CapTrust’s Jeb Graham, a partner and retirement plan consultant. He expects that to work its way down. But for midmarket plans, institutional share classes of mutual funds are more efficient.
3. Getting all the monitoring data may take more effort. Asked if the execution of monitoring is harder for collective trusts than for mutual funds—even though the duty is the same—Jones says, “Five or 10 years ago, my answer would have been, ‘yes.’ Sponsors had to get investment information from providers and then do their own analysis.” Today, he says, Morningstar’s collective investment trust (CIT) database and tools from others such as eVestment Alliance help. “There are a number of providers that have pretty vast databases,” he says.
However, overall, gathering data for collective trusts is still more difficult than for mutual funds. “You do have to have some level of sophistication in your monitoring service, or you may need multiple services or your own technology,” says Thomas Clark, president of Lockton Investment Advisors. Advisers need a system that can accept collective trust returns and convert them into a monitoring scorecard. The ease of getting that information has a lot to do with the quality of the adviser’s relationship with the collective trust provider, Clark says. Big collective trusts work to forge those ties, he says. If an adviser does not have a pre-existing relationship with a smaller CIT, he says, “either you have to go get that information, or, if you develop a relationship with the manager of the CIT, you can agree to a schedule for the manager to send that information to you quarterly.”
4. Track the use of securities lending. Unlike mutual funds, collective trusts can do securities lending, which partly explains the lower investment fees, Clark says. “Try to monitor how involved they are in securities lending,” he recommends. “Look at: What percentage of their assets are subject to securities lending? What is the potential impact on liquidity? And, of the profits made in securities lending, how much goes to participants versus to the investment manager?”
5. Think about transparency. Since collective trusts do not have a ticker symbol, Taylor says, participants who want information will probably have to search their plan’s website or statement instead of online financial sites or the newspaper. But Callan finds that participants rarely object to that, he adds.
Still, many sponsors see a real issue. “The thing that we hear most commonly from sponsors and consultants is that participants want to go on Yahoo Finance and search the ticket of what they’re invested in,” Jones says. “So for a long time they shied away from collective trusts. I don’t know that that has changed—we still hear it. We see plan sponsors and committees stay with mutual funds because of that. But in other cases, when they look at the pricing differential, they say, ‘That is worth it for out participants.’”
Large plans have used CITs for many years, Jones says, and participants have seen white-label investment products without brand names but names such as “Large-Cap Blend,” he says. “Atthe end of the day, I don’t think it’s a big deal for participants, as long as there’s a trust that the employer and committee are looking out for their best interests,” he says.