Collective investment trusts (CITs): Benefits & Capabilities Presented to: National Council on Teacher Retirement

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1 Collective investment trusts (CITs): Benefits & Capabilities Presented to: National Council on Teacher Retirement March 29, 2017

2 Agenda Overview of collective investment trusts (CITs) Comparison of CITs to mutual funds Demand for CITs Top 5 reasons plans use CITs 403(b) plan limitations & actions necessary to allow eligibility Q & A

3 Collective investment trust overview Structure Regulator Governance Eligible investors Tax structure Trading Bank-sponsored pooled investment vehicle Primary: Office of Comptroller of the Currency OR State Banking Examiners Secondary: US Department of Labor (DOL) Internal Revenue Service (IRS) Securities and Exchange Commission (SEC) Financial Industry Regulatory Authority (FINRA) Commodities Futures Trading Commission (CFTC) A Declaration of Trust specifies how the bank/trust company will manage and administer the fund(s) Available exclusively to qualified retirement plans of all sizes; defined contribution and defined benefit; no retail investors Tax exempt; all dividends and capital gains are reinvested back into the funds share price; exception is daily accrual funds such as stable value Daily, NSCC

4 CITs vs. mutual funds Collective Investment Trusts Mutual Fund Fee Flexibility Yes No Transparency of Holdings Monthly Portfolio Holdings available on-line Yes Yes Institutional-Quality Quarterly Reports Yes No On-Line Account Web Access Yes Yes Daily Priced/Traded Yes Yes Traded on NSCC Fund/SERV Platform Yes Yes Fee Transparency Comply with DoL 5500 Reporting, 408(b)2, 404(a)5 Yes Yes Investment Guideline Transparency Detailed Investment Guidelines Yes Yes Monthly Portfolio Characteristics Yes Yes Quarterly Fund Fact Sheets Yes Yes Third party data aggregator support Improving Yes Investor Limitation Qualified Retirement Plans Only Open to all investors

5 Top 5 reasons for qualified plans to use collective investment trusts 1 Cost & fee flexibility May be less expensive than other investment options Customizable fees can be negotiated for larger plans with economies of scale Share classes available where all fees and expenses are netted from the daily traded net asset value (NAV) and capped at a fixed rate (i.e. all in ) Share classes available with 0 revenue sharing or various levels of revenue sharing 2 Regulatory Plan sponsor concern over increased regulatory focus on participant expenses DoL Fiduciary Rule/Fiduciary of ERISA Assets New 5500 Reporting

6 Top 5 reasons for qualified plans to use collective investment trusts 3 Efficiencies Investment management and trading benefits from stable cash flows sticky assets Exclusive to qualified retirement plan investors no pricing fluctuations due to retail cash flows International Swaps and Derivatives Association (ISDA), subcustodian and futures agreements contracted by the trustee and fund not the plan 4 Availability in smaller plans Increased availability to smaller plans via omnibus structure Minimums waived for many platform relationships 5 Glide Path/ Target Date Funds Act as an underlying sleeve in Target Date Funds (TDFs) due to lower cost and ability to customize the management fees outside of the fund no double layer of fees to participants Access to alternatives can fully implement strategies and are not restricted by retail guidelines

7 Summary When retirement plan fiduciaries consider CITs, they should remember three things: CITs are regulated and comply with ERISA & disclosure requirements CITs only include retirement plan investors CITs offer a wide range of strategies at equal or lower cost than mutual funds

8 Evolution of CITs 1927 CITs first introduced 1936 CIT use expanded in DB plans when Congress amended the Internal Revenue Code to provide tax-exempt status to certain bank-maintained CITs 1955 CIT use expanded further with the Federal Reserve authorization for banks to combine funds from pensions, profit sharing and stock bonus plans, and the IRS determination that such CITs could be tax exempt 2000 CITs began trading on the NSCC s FundSERV platform 2012 DOL required all investment option providers to standardize risk, performance, and expense disclosures

9 Collective investment trusts: growing demand In DC investment lineups, use of CITs is increasing, while use of mutual funds is decreasing 1 Collective Investment Trusts 48.3% 60.0% 65.2% 2016 Mutual Funds 84.3% 88.2% 92.0% % 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% CITs hold over 36% of target retirement date/lifecycle fund assets within large DC plans % 36.1% 45.9% Mutual Fund Collective Investment Trust Separately Managed Account 1 Source: Callan, 2017 Defined Contribution Trends Survey. 2 Source: Plan Sponsor Council of America s 57th Annual Survey of Profit Sharing and 401(k) Plans (Reflects plans with 5,000 or more participants) 2014.

10 Barriers to 403(b)s Investing in CITs Under the federal securities laws, 403(b) Plans are treated as a retail product, not a retirement plan product The retirement plan exceptions: 3(c)(11) of the Investment Company Act 3(a)(2) of the 33 Acts Limits investments to certain plans

11 What Avenues May Be Available to Address? SEC No-Action Letter? Rulemaking? Legislation? Prior SEC Activity 1992 SEC Staff Study 457 Plans

12 Important information FOR US INSTITUTIONAL USE ONLY NOT FOR USE WITH THE PUBLIC NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE All data provided by Invesco Trust Company unless otherwise noted. The Invesco Collective Investment Trust funds are bank collective investment trust funds for which Invesco Trust Company serves as trustee and investment manager. The funds are not FDIC insured or registered with the Securities and Exchange Commission. Fund investors and potential investors are strongly encouraged to review the funds Declaration of Trust for additional information regarding the operation and investment objectives of the funds. Invesco Distributors, Inc. is the US distributor for the Invesco Collective Investment Trust Funds. Both Invesco Trust Company and Invesco Distributors, Inc. are indirect, wholly owned subsidiaries of Invesco Ltd. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The Invesco Collective Investment 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: Defined Contribution 401(k) Plans, Profit Sharing Plans, Stock Bonus Plans, Thrift Plans, Money Purchase Plans, Target Benefit Plans and Taft Hartley Plans. Defined Benefit Pension Plans, 457 Plans, Cash Balance Plans, Master Trusts, Insurance Separate Accounts. Examples of Ineligible Investors include health and welfare plans, IRAs and 403(b) plans and plans with self employed investors.