Understanding Collective Trust Funds and Trends in the Marketplace Sharon Ennis, SVP April 12, 2017
U.S. Total Market Retirement Trillions of dollars, end-of-period, selected periods Total U.S. retirement assets were $24.0 trillion as of December 31, 2015, up 3.0 percent from the end of September and about unchanged for the year.. Retirement assets accounted for 34 percent of all household financial assets in the United States at the end of the fourth quarter of 2015. Source: ICI Quarterly Retirement Market Data 4Q 2015 for full details 2
Retirement Plan Products Mutual Funds ( 40-Act Funds ) Collective Funds ( CITs ) Separate Accounts Self Directed Brokerage Unitized Vehicles Annuities Insurance Product Private Funds 3
Investment Products Used in DC Plans Does your plan offer the following investment types within the fund lineup?* Collective trusts notably increased in prevalence, with 70.8% of plans offering them in 2015, up from 60.0% in 2014. Collective trusts are a common stable value option (43.4%) but more often are used for other (i.e., non-stable value) funds (49.6%). Source: 2016 Callan DC Trends Survey 4
Two Broad Types of Bank Funds Collective Investment Trust Funds Bank can have agency relationship with plan investors. Limited to certain types of qualified plans. Common Trust Funds Bank must have bona-fida fiduciary relationship to investors; includes non-qualified plan investors, e.g., endowments, foundations, personal trusts etc. 5
Evolution of Collective Funds Been around for more than 75 years Initially bank managed for it own clients, primarily defined benefit plans Significant move towards mutual funds in 1990s 2000 NSCC processing of CITs began 2006 Pension Protection Act Target Date Funds QDIA 2012 DOL 408(b)2 and 404(a)5 enhanced fee disclosure Everything new is old 6
Then and Now Early CITs Lack of pricing flexibility at the plan level Modern CITs Plan level pricing flexibility often available Limited product offerings Quarterly valuations Manual processing of investor contributions and withdrawals Limited performance calculations based on quarterly valuations Limited availability of fund data Used almost exclusively in DB plans Expanded universe of investment strategies Daily valuations Full automation available through the NSCC Generally available due to daily valuations Fund Fact Sheets & enhanced data reporting Used in both DB & DC plans 7
Who Can Invest in a CIT? Certain types of government retirement plans: 401(k) plans, pension, profit sharing, stock bonus, and other specific trusts that are exempt from federal income tax under Internal Revenue Code Section 501, including other CITs Plans that include self-employed persons (HR 10 plans) may invest if the CIT does not invest in private placement 144A securities CITs in certain asset classes may accept investments from church plans If invested prior to December 31, 2011, certain Puerto Rican retirement plans may remain invested in a CIT Notable ineligible investors: CITs may not hold assets of 403(b) plans, IRAs, or health savings accounts 8
Regulatory Oversight CITs are subject to many laws and regulations, including those administered by: State and federal bank regulatory agencies (particularly the OCC) DOL IRS SEC Financial Industry Regulatory Authority (FINRA), to the extent the CITs are marketed by a broker dealer; and Commodities Futures Trading Commission (CFTC), to the extent the CITs invest in commodity interests, such as futures or swaps. 9
CITs vs Mutual Funds - Not Identical Twins Feature Collective Trusts Mutual Funds Availability Limited to qualified plans General Public Pooled Vehicle Yes Yes Daily Trading & Valuation Yes but not all Yes Clearing NSCC NSCC Identifier CUSIP CUSIP and Ticker Governing Document Declaration of Trust Prospectus Third Party Platform Coverage Yes but not all Yes Enrolling Plan Sponsor must adopt CIT term Prospectus Regulatory OCC, IRS, DOL, SEC SEC Advertising No Yes Morningstar Data Yes Yes Fees Flexible Structured 10
CITs vs Mutual Funds - Not Identical Twins Collective Funds Qualified plans only Declaration of Trust OCC and State Regulated Trustees Held to ERISA Fiduciary Standards Data Provided by Manager Institutional Pricing Pricing Flexibility Pooled Vehicle Daily Valued NSCC Traded Fact Sheets Annual Audit Mutual Funds All Investors Prospectus SEC Registered No ERISA Fiduciary Standard Data Publicly Available Institutional and Retail Pricing No Pricing Flexibility 11
CIT AUM Is On the Rise No centralized repository of CIT data total number of funds, strategies, AUM is an industry unknown NSCC CIT transaction activity continues to show increases year of year, 6% increase in 2016 over 2015 and a stunning 31% increase in 2015 over 2014. Since 2006, Morningstar has increased the number of CITs it tracks by 55% Callan estimates that 70% of all plans used a CIT in 2014, up from 60% in the previous year Reuters put the CIT assets of two trust companies BlackRock and State Street - to be $2.2 trillion combined at the end of 2014 WSJ reported in 2015 an estimated $2.3 trillion in CIT assets 12
Fee Benefits of CITs Fee Differentials based on an assumed mandate of $100mm Mutual Funds Collective Trusts U.S. Large Cap 0.78% 0.50% U.S. Small Cap 1.01% 0.80% Non-U.S. Equity 0.75% 0.69% Core Fixed Income 0.46% 0.27% With lower overhead SEC registration, promotional materials as well as paying board members there is a fee benefit to using collective trusts. Source: Callan 13
Industry Trends Impacting CIT AUM Plan sponsors seeking ways to reduce total plan cost and enhance plan health; employers taking more interest and responsibility for employee retirement outcomes Increased interest for fiduciary support by plan sponsors (DOL Fiduciary Rules issued April 2016) plan governance and centralized investment oversight Asset class exposure (uptick in alternatives and fixed income strategy interest; foreigns; TDF sleeves) Investment managers seeking flexibility in offering their strategy(ies) in multiple legal structures - plan sponsor chooses vehicle, e.g., separate account, group trust, mutual fund, collective fund 14
Industry Trends Impacting CIT AUM Advisors in the retirement space: Consolidation and focus on differentiation through plan health and participant retirement outcomes, e.g., plan design features and custom target date/risk solutions Increasing use of liability driven investing (LDI) in DB plans with use of passive strategies likely to increase to help lower costs 15
Coalition of Collective Investment Trusts 40-member companies representing fund sponsors and money managers active in the collective investment trust industry Forum for discussing and developing best practices for legal and operational issues relating to CITs Regular updates with respect to legal and regulatory matters affecting CITS Where desired by the members, to express opinions (e.g., by filing comment letters) on matters of interest to CIT sponsors Sutherland Asbill & Brennan LLP serves as counsel to the CCIT and actively reports to Coalition members regarding relevant regulatory (including OCC, DOL, and SEC) developments of interest to the members. http://www.ctfcoalition.com or for further information contact Clifford Kirsch at 1-212-389-5052 or Mark Smith at 1-202-383-0221 16
Sharon Ennis Sharon.ennis@fisglobal.com