Collective investment trusts have historically been a low-cost investment vehicle serving midsize to large defined-benefit and defined-contribution plan sponsors. And while the economy’s strength is rebounding, a ripe comeback of the trusts seems to be moving on many fronts, with multiple providers offering new products, as well as smaller employers finding value in having access to more managers offering the investment.
Collective investment trusts “are definitely growing in acceptance and availability,” says Pam Hess, director of retirement research for Hewitt Associates. “It feels like we’ve turned a corner.”
Chicago-based Morningstar currently tracks nearly 1,200 collective investment trusts (CITs) and found that 159 of them were introduced in 2009, the largest growth in 20 years. Overall, CITs account for $1.6 trillion of the $13.4 trillion total retirement market assets in 2009, Morningstar reports.
Established providers, as well as new entrants, are vying for a share of this marketplace, offering myriad strategies in multiple sectors with varying degrees of risk, says Steve Deutsch, Morningstar’s director of collective trusts and separate accounts.
Years ago, the class of investment focused on stable value or more conservative approaches. Now more sophisticated strategies, including alternative investments such as real estate, are available. The number of new collective trust target-date funds in 2009 nearly tripled to 115 from 2008, Morningstar data showed. Meanwhile, minimum investment floors have lowered considerably, from $5 million last year to $100,000 today.
Collective trusts work similarly to mutual funds in that they pool assets from multiple clients. But they are only for institutional investors and fall under banking regulations, not Securities and Exchange Commission rules. SEC rules don’t require the reporting, disclosure and other operational costs that mutual funds bear. Plus, since they serve as an institutional-only vehicle, costs such as retail advertising or marketing don’t exist. Studies have shown CITs can offer similar returns to mutual funds, but cost 25 percent less.
The trusts have provided an investment option for years. But interest soared following a 2006 federal law obligating plan sponsors to find low-cost investment options. The 2006 Pension Protection Act also allowed collective trusts to be qualified default investments for defined-contribution plans.
Now that many businesses are rebounding, and are focusing on retirement issues, collective investment trusts are becoming an attractive way to lower fees and increase fiduciary oversight.
Given the large number of trusts entering the market, plan sponsors have a better chance of finding one that fits their needs, Hess says. “Competition is generally a good thing,” Hess says. “This investment is no longer a niche.”
Last October, American Century Investment launched a suite of a dozen CITs, offering a full range of investment choices. Meanwhile, with its battery of 200 collective trusts, First Mercantile Trust is projecting sales to increase by more than 85 percent this year, most of which is expected to come from the $1 million to $30 million small-plan-sponsor universe. “Every week we hear from a new money manager” wanting to enter the market, Deutsch says.
Creating the investment suite came mostly from plan-sponsor demand, says Drew Billingsley, vice president for institutional strategies at American Century. In Hewitt Associates’ “Hot Topics” survey released this year, 46 percent of defined-contribution plan sponsors said they intended to review fund operations, including fund expenses and revenue sharing, which are clearly defined cost-reducing components of collective trusts.
“Employers want to leverage the purchasing power in their plans,” Hess says. “Every basis point today counts.”
There are a good number of solid boutique sub-advisors offering focused strategies,” says Ed Riley, CFO of First Mercantile Trust. But without the sophistication large plans bring to searches, “small plan sponsors wouldn’t know where to identify these providers, let alone access them,” he says.
That’s part of the value that small companies such as Herrick Corp. see in collective trusts. Herrick’s $37 million 401(k) plan has 1,300 participants and offers 15 different collective trusts with varying degrees of risk, all managed by First Mercantile Trust.
“Just in our process of doing an RFP, a lot of money managers wouldn’t even talk to us,” says Pete Avila, CFO of the Stockton, California-based construction company.
And, just as small plan sponsors are seeing an advantage, larger ones are becoming more sophisticated and customizing collective trusts, experts say.
For many large customers—employers with $1 billion or more in assets—a customized approach can extract the best managers in various asset classes to match the glide path of their participants, says Robyn Credico, senior retirement consultant at Towers Watson. At the same time, customization can save 30 to 40 percent in costs they would otherwise pay for a similar mutual fund structure, she says.
“Most vendors don’t do well in every asset class,” Credico says. “This approach can create some significant savings.”
Collective trust fees are more transparent than mutual fund fees, making CITs more attractive to plan sponsors looking for ways to reduce fiduciary risk. Recently, big companies including Wal-Mart, Caterpillar and John Deere have been sued for high fees in their defined-contribution plans.
Six out of 10 defined-contribution plan sponsors in the Hewitt survey said they planned to review plan governance structure, including fiduciary issues. “The more [participants] ask questions, the more plan sponsors are going to need to defend their choices,” says Lori Lucas, defined contribution practice leader at Callan Associates.
Since banks act as trustee, they also must provide fiduciary oversight—a definite plus for many plan sponsors, especially smaller employers. “For those of us who don’t have the time to track mutual funds to make sure people are protected, it’s nice to have an investment manager oversee funds on a daily basis,” Herrick’s Avila says.
And while plan sponsors are sizing the investment up, federal officials are taking a closer look as well, questioning whether participants are adequately protected.
Andrew Donohue, head of the SEC’s investment management unit, said in a recent speech that the agency would be analyzing whether regulatory reforms were needed to ensure participant safety, in light of the investment’s increasing popularity among retirement funds.
Heightened federal attention is not surprising, observers say.
“This investment vehicle has significant assets under management,” Morningstar’s Deutsch says. “Questions are arising and there is every indication they are under active review.”
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