Collective Trusts 101
Collective or commingled trusts represent an alternative investment vehicle
to mutual funds. Both are investment vehicles comprised of pooled assets invested in
securities according to a predetermined strategy to meet a specified objective. Needs and
investment objectives vary from one client to the next. Some clients' needs can best be
met through investment in a mutual fund, while other clients will best be served by
investing in a collective trust. The information contained here is intended to illustrate the
differences between the two investment vehicles so that an informed choice can be made
as to which option will best serve your investment objectives. None of this information
should be construed as an offer to buy or sell any financial instruments. As with all
investments there are associated inherent risks. Please obtain and review all financial
material carefully before investing.
Collective Trust Regulations
Collective trust products are sponsored and maintained by a bank trust
department or a trust company. The primary regulator for collective trusts is the
Department of Treasury / Office of the Comptroller of the Currency (OCC) pursuant to
OCC Regulation 9.18 rather than the Securities and Exchange Commission (SEC). The
Department of Labor also has oversight for the funds through its oversight of ERISA
Summary of Key Differences
Collective trusts are designed exclusively for qualified retirement
plans. Only available through banks and trust companies
Regulated by the Office of the Comptroller of the Currency (OCC)
Functional equivalent of mutual funds but not required to register as
investment companies as they only accept investments from qualified retirement plans
Do not advertise to the public
Do not produce a prospectus
Relatively low cash balances due to more stable investor cash flows
Operating expenses charged daily
Management Fees outside the NAV & are negotiable
Dividends & Capital Gains are not paid out. All earnings
reinvested back into the fund and any profit or loss to the fund is reflected in the daily
How do Collective Trusts Differ From Mutual
Unlike mutual funds, collective trusts are exempt
from the investment company registration requirements of the Investment Company Act
of 1940 and the securities registration requirements of the Securities Act of 1933.
Collective trusts are therefore not subject to the same fund registration fees and
expenses as mutual funds, such as the requirement to produce a prospectus. In order to
qualify for this exemption, the collective trust must be maintained by a bank and investors
must be limited to certain qualified retirement plans. As a result, collective trusts are not
available or advertised to the general public.
Because collective trust funds are only available to
qualified retirement plans, they generally keep much lower cash balances than retail
mutual funds since retirement plan participants usually leave their money where it is
longer and tolerate market fluctuations better than retail investors. This allows collective
trust managers to reduce cash flow volatility because they do not have to raise cash to
meet redemptions as often. Since cash balances are generally very low, more of an
investor’s contributions remain fully invested in the market.
There is no prospectus or statement of additional
information for the Institutional Retirement Trust collective trust funds. Instead, the
offering documents for the funds is the Declaration of Trust, which contains a description
of each of the funds and the provisions governing their operation. Each investing plan
executes a standard Participation Agreement prior to investing in which the plan
represents that it is eligible to invest in the collective trust. The Participation Agreement
also contains the fee schedule for the plan’s fund investments.
The key difference between collective trusts and
mutual funds is that collective trusts are exempt from the investment company
registration requirements of the Investment Company Act of 1940 and the securities
registration requirements of the Securities Act of 1933. These exemptions are available
because collective trust funds are not available to the general public. They can only be
offered by a bank to certain qualified employee retirement plans. The reasoning is that
qualified plans do not require the protection of registration because individual investors /
plan participants are already protected through other fiduciaries. In addition to the trustee
for the collective trust funds who acts as fiduciary for all fund investors, individual plan
participants investing in the funds are also protected by an independent plan fiduciary,
usually the plan sponsor.
Who Can Invest in Collective Trusts?
Collective trust funds are only available to investors in qualified retirement
plans. Qualified retirement plans include any and all employee benefit plans as defined
under section 401(a) of the Internal Revenue Code, certain governmental plans and
insurance separate accounts consisting solely of assets in qualified retirement plans.
This includes the following defined contribution and defined benefit plans:
– 401(k) Plans
– Pension Plans
– Profit Sharing Plans 1
– 457 Plans
– Stock Bonus Plans 1
– Cash Balance Plans
– Thrift Plans
– Master Trusts
– Money Purchase Plans
– Insurance Separate Accounts
– Target Benefit Plans
– Taft Hartley Plans
1 May include a 401(k) feature.
Examples of Ineligible Investors include health and welfare plans, IRAs and
403(b) plans and plans with self employed investors.
Fund operating expenses such as audit, custody, fund accounting, and
transfer agency fees are accrued and posted daily to the total fund assets. Fund operating
expenses are deducted daily from each fund prior to striking the daily net asset value for
the fund and prior to calculating performance. Fund operating expenses are expressed as
a ratio of total assets. The most recent audited expense ratios for the Invesco Collective
Trust funds can be found in the annual report. Quarterly unaudited expense ratios can be
found on the quarterly Fund Overviews / Fact Sheets. The expenses on the funds are
generally lower than those for mutual funds and decrease as fund assets grow.
One of the more well-known features of collective trust funds is their ability
to charge negotiable fees to their clients. The Invesco Collective Trust Funds charge
according to an asset-based fee structure allowing clients with greater assets invested to
pay a lower fee through consecutive breakpoints. Management fees are specific to each
account. They accrue daily based on the account's market value and are redeemed from
the account monthly. Management Fees cover the administrative services provided by the
Trust Company, the sub-advisor to the fund and the marketing costs assumed by the
distribution channels selling the funds.
Dividends and Capital Gains
Collective trust funds generally do not pay out dividends or capital gains. All
income and earnings from the sale of securities are reinvested back into the fund with a
resulting increase/decrease in share price. In other words, any profit or loss to the fund is
reflected in the share price daily. The exception to this is the Invesco Stable Value Trust.
In order to maintain a stable share price of $1 per share, all dividends for this fund accrue
daily and are reinvested back into investor accounts on the last business day of the
month as dividends.
Net Asset Values and Performance
Net asset value (NAV) and performance for collective trust funds is
calculated differently from that of mutual funds. Unlike mutual funds, the NAV of a
collective trust fund generally does not reflect the deduction of investment management
fees, although it does include fund expenses. Note, however, that some funds within the
Institutional Retirement Trust offer multiple share classes, some of which have NAVs
reflecting the deduction of the management fees for that class of shares.
Returns for trusts are calculated gross of fees or standard net of fees. Gross
of fees fund performance is calculated before the deduction of management fees but after
the deduction of fund operating expenses. Standard net of fees fund performance is
calculated after the deduction of fund operating expenses and after the deduction of the
standard investment management fee applicable to the fund. Individual Plan performance
will vary depending upon the timing of contributions and withdrawals and upon the
individual Plan's fee schedule. The monthly-adjusted returns are compounded and then
annualized to compute the long-term returns.
Net of fees returns, as provided by the Trust Company, are net of our
standard management fee, which does not include any client service fees and may not be
the actual fee paid by the Plan. The actual investment management fee varies for each
Plan based on the fee negotiated with the Plan. This negotiated fee can fluctuate daily
based on the various asset level breakpoints reached at the time the daily fee accrual is
calculated for each Plan.