Time to Consider a Collective Trust?

For those who need a crash course in CITs, Kent Buckles, executive vice president of retirement strategies for Reliance Trust, says the products often serve as an alternative to mutual funds. CITs are investment vehicles in which assets from multiple plans can be commingled into one trust.Each CIT is managed professionally on behalf of those plans and not open to the public. For that reason, they’re only available as an investment option within employer-sponsored plans that have negotiated an agreement with the CIT provider.

Another defining characteristic of CITs is that they are regulated more as a banking product than an investment fund, Buckles says. Therefore the products fall under the oversight of state banking regulators and the federal Office of the Comptroller of the Currency (OCC), rather than the Securities and Exchange Commission (SEC). The OCC regulators are rigorous in their examinations of trust companies and CITs, he says, but providers in the space are advantaged in that the OCC requires less documentation and pre-approval compared with the SEC. 

Buckles says the appeal of CITs for plan sponsors and fiduciaries is generally a lower expense profile and an improved ability, especially for larger plans, to create unique investment funds that address the needs of real plan participants in a more refined way then retail target-date funds. This can be accomplished because the sponsors can work directly with fund managers to discuss and meet the investing needs of their participants, factoring real-world demographic data into portfolio design decisions. Mutual funds, on the other hand, tend to make portfolio decisions based on much wider demographic considerations.

CITs have historically been used in defined benefit (DB) plans and in the larger defined contribution (DC) and profit sharing plans. DC plan sponsors moved away from CITs as retirement plan administration moved to daily valuation. CITs weren’t priced daily or traded daily, but that issue has disappeared. Today CITs trade on the same platform as mutual funds. Internet connectivity allows plan participants to track performance of their CITs on a daily basis.

“The growth really isn’t all that different from what you see happening in other parts of the industry, which is to say it’s strong,” Buckles tells PLANADVISER. “You never know exactly what the numbers are in total, but based on the research that we see, the growth seems to be pretty dramatic for collectives overall. Especially within the defined contribution space and among more of the smaller plan segments.”

A 2013 survey by financial research and consulting firm Celent found, from 2006 to 2010, the share of collective trusts as a percentage of the defined contribution market doubled—from 10% to 20%. In actual dollars, the jump was from $400 billion to $900 billion, the survey report, “The Defined Contribution Market,” noted.

At Reliance Trust, assets in CITs have grown from a small portion of the firm’s $100 billion in total assets under management to about $6 billion since the firm first introduced a CIT product more than a decade ago—with most of the growth coming from a significant acceleration in the last three years. Buckles says Reliance’s developments in the field have largely paralleled the wider industry movements, both in terms of annual growth and the type of products that sponsors are interested in.

“The first collective fund we offered was a stable value fund—and we have stable value funds that we still sponsor,” Buckles says. “Beyond that, we have moved into offering funds in the fixed-income space, real estate, and stand-alone large cap equity funds, and of course the target-date offerings are becoming increasingly popular.”

In general, Buckles says the streamlined reporting requirements and the elimination of excess administration possible through a collective trust arrangement allows participants to access diversified investment funds at a 10 or 15 point discount compared with mutual funds that take similar strategies. He has seen examples where plans have been able to replace actively managed mutual fund options with more passive-based CITs, cutting as much as 50 basis points from investment costs.

Another point Buckles is quick to make about CIT growth is that it’s not just coming from the large DC plans and big pension funds that have traditionally had the asset-muscle to benefit from economies of scale via access to preferred share classes.

“In the smaller plans, what’s attractive about the collectives is that because they are comingled, you don’t have the limitations that you’ll have with an institutional fund on the mutual fund side,” Buckles explains. “So if you want to offer a low-cost institutional mutual fund, usually you’re going to have some type of a minimum amount before you’ll be able to invest in the best share classes. You don’t have that issue with the collective arrangement.”

That’s because the trust company providing the CIT serves as both the fund trustee and administrator—delivering many of the pieces that are required to bring the products to participants and the marketplace, such as daily valuations, fund fact sheets, Morningstar updates, and all the related legal documentation. When all of those functions are brought under one roof, they can be done more efficiently.

“So we are the manufacturer, not so much the distributor,” Buckles explains. “Though we do have some wholesalers that talk to advisers about our offerings, generally speaking the distributors are really the recordkeeping platforms, the independent advisers, etc.”

Buckles says plan sponsors also tend to be attracted to the fact that, in its role as a trustee of assets earmarked for a CIT arrangement, the provider becomes a plan fiduciary.

“For that reason, we’re directly liable if there’s anything that’s found that’s not in compliance with the OCC regulations,” Buckles says. “That’ means we’re aggressively self-policing, and each of our funds has to be audited by a third party at least once a year.”