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Collective Investment Funds: Lower Fees, But Less Transparency

By Brian OConnell  2/12/2006
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With an ever-growing assortment of investment vehicles to choose from, defined contribution plan managers must feel like they're at Baskin-Robbins.

Now another flavor can be added to the investment menu: collective investment funds. While not new (they were popular in the 1980s), these funds—also referred to as "collective trusts," "commingled funds" or "commingled trusts"—have been making a comeback. In fact, according to Cerulli Associates, a leading research and financial services advisory firm, over 17 percent of 401(k) assets—thats more than $330 billion—are invested in collective investment funds. Another 17 percent can be found in so-called "separate accounts," which are similar to collective funds but designed for a single retirement plan that owns the underlying investments.

Here's the skinny. Like regular mutual funds, collective investment funds are pools of assets that typically buy stocks and bonds, and participants own shares in the collective fund as opposed to owning the underlying stocks or bonds. But unlike mutual funds, most collective funds are offered by banks and trust companies, and are made available only to qualified retirement plans such as 401(k)s. This helps keep their fees substantially lower than retail mutual funds, allowing employers to provide participants with a more cost-effective investment selection.

Unlike mutual funds, most collective funds
are offered  by banks and trust companies.

Unlike exchange-traded funds, another low-expense mutual fund alternative, collective funds aren't purchased through a broker, which means participants won't face commission charges when they buy or sell shares.

Basically, collective funds work by gathering lots of smaller accounts and merging them for investment purposes," explains Michael Wright, a principal with Buck Consultants in New York City.

Smaller Fees

Since collective funds serve as an institutional-only vehicle, costs such as retail advertising or marketing don’t exist. Studies have shown collective funds can offer similar returns to mutual funds, but with substantially lower annual fees.

"You definitely save on fees with collective funds, and that's the main selling point," says Chris Mullahy, a senior vice president at IXIS Asset Management Advisors Group. "You can save 10 to 20 basis points on fees, which can really pay off big down the road. Plus, they are less expensive for the investment manager to operate than mutual funds."

According to Hewitt Associates, retirement plans may be able to cut portfolio expenses 30 percent to 50 percent by switching to collective funds from mutual funds.

Mullahy also points out there is some flexibility with collective investment funds in terms of being able to adjust fees, while there is less ability to negotiate lower fees with mutual funds. And if a collective fund is under-performing, "you can drop it and make changes more easily," he comments.

But Mullahy urges HR managers to check that a collective fund is traded through the National Security Clearing Corp., to be sure it complies with industry guidelines.

Less Standardized Reporting

There are a few other points to keep in mind. For instance, collective funds are regulated by federal and state banking and insurance regulators rather than by the Securities and Exchange Commission (SEC), which oversees mutual funds, Wright says.

And because these funds are not SEC regulated, there is no requirement for their performance to be reported daily in the newspapers or on financial web sites, like mutual funds, "so if your plan participants like that hands-on approach, collective funds might take some getting used to," Wright cautions. In fact, collective funds are required to determine the market value of their assets just once every three months, and they aren't required to send out prospectuses or regular shareholder reports.

Generally, you find this type of fund in larger plans because they have more assets to work with, says Jeff Elvander, chief investment strategist at 401(k) Advisors, one of the nations largest independent 401(k) consulting firms.

There is less reporting so human resource managers need to be diligent in getting information from the plan manager, Elvander adds. Plan sponsors have a fiduciary responsibility to educate themselves about the various plans available to participants, and thats where an independent adviser comes in handy as opposed to getting information from the investment vendor.

Keeping Participants Informed

As with a mutual fund portfolio, Mullahy stresses the importance of educating plan participants about asset allocation. Ask for solid communication materials from the provider, an enrollment packet with a fact sheet just like you would get with mutual fund options," he recommends, so participants can compare investment vehicles side by side. And make sure you can get support from your investment manager. They should be willing to work with you to determine whats best for your plan participants and how to communicate it.

Brian OConnell is a freelance writer specializing in financial, health care and career management issues. His articles have appeared in The Wall Street Journal , the Boston Herald , USA Weekend , CFO and other publications.

Related Articles: SHRM

Hide in Plain Sight: Finding Hidden Fees in 401(k) Plans, SHRM Online Benefits Discipline, February 2006

Exchange-Traded Funds: Less Expensive 401(k) Plans, SHRM Online Benefits Discipline, June 2005

Related Articles: External

Employers Take a Second Look at Collective Investment Trusts, Workforce Management, June 2010

Move Over, Mutual Funds, Here Comes Commingled, Pensions & Investments, October 2007

Firms Alter 401(k) Choices, Wall Street Journal, February 2006

Firms Revive Low-Cost 401(k) Option, Wall Street Journal, January 2006

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