PLANADVISER - September/October 2018 - 53

a lower tax than mutual funds do, and, depending on which
index a fund is tracking, the benefit can be from 7 basis
points [bps] to 30 basis points in annual returns. "
Significantly, fees can be lowered. Unlike with mutual
funds, fees on collective trusts are subject to negotiation.
" Mutual fund fees are fixed by share class, while trust fees
are determined on a plan's overall relationship with the
fund trustee, " notes Susan Czochara, head of retirement
solutions product strategy at Northern Trust Asset Management
in Chicago.
Size matters in such negotiations, so that larger plans
are likely to realize lower fees. However, smaller plans can
leverage their adviser's relationships with CTF trustees.
" Mega-size plans can negotiate fees on their own, " says
Todd Stewart, managing director of investment research
in the Knoxville, Tennessee, office of SageView Advisory,
which oversees $88 billion for 1,250 midsize DC plans across
the U.S. " While a $300 million plan is sizeable, we can [additionally]
bring our overall asset base to bear, to drive down
fees further. You can't do that on the mutual fund side. "
Lastly, CTFs are subject to a different regulatory structure,
which lowers the cost of trustees' operations. Under
Securities and Exchange Commission (SEC) rules, mutual
funds have to draft and file voluminous prospectuses,
which creates a big additional expense for fund managers,
O' Meara says.
Now, this is not to say that CTFs are not regulated. Simply
stated, the primary regulator of U.S. mutual funds is the
SEC, while collective trusts are overseen by the Office of the
Comptroller of the Currency (OCC), a banking regulator. And,
depending on how they are marketed and the asset composition
of the trust, collective trusts are also regulated by the
IRS, the SEC, the Financial Industry Regulatory Authority
(FINRA) and the Commodities Futures Trading Commission.
The finer points of CTF regulation are well-explained in a
comprehensive white paper, " Collective Investment Trusts, "
published on the website of the Coalition of Collective Investment
Trusts.
Advisers looking to take advantage of CTFs need to shift
their mindset-if only somewhat. " Advisers' due diligence
on a CTF, versus that on a mutual fund, is about 90% the
same, " says Bruce Ashton, an Employee Retirement Income
Security Act (ERISA) specialist in the Los Angeles office
of attorneys Drinker Biddle & Reath. " They would look at
the investment performance and cost of the fund, and the
history and ability of the trustee and investment manager,
as well as any sub-advisers managing the day-to-day investments.
Frankly, I don't see much difference. "
He does note one important difference: " The trustee is an
ERISA fiduciary to the plan, whereas the manager of a mutual
fund would not be. That's a good thing, in that there is
another fiduciary minding the store. But the adviser needs to
take that into account and perform some extra due diligence
on the trustee, looking at its experience managing collective
trusts " and what backs up its fiduciary pledge.
According to Ashton, crucial to a collective trust is to
include IRS-eligible qualified plans as investors, which
" We see a lot
more inquiries
[about CTFs]
from advisers
serving small
to midsize
DC plans. "
exempts it from securities
registration. " There is also a
requirement that the trustee
'create and manage' the fund,
meaning it has oversight over
everything. At some level,
the adviser will need assurance
that the bank or trust
company is maintaining that
degree of control. "
The OCC publishes a
helpful Comptroller's Handbook
on retirement plan products
and services, intended
to guide its examiners' work on collective trust funds. Plan
advisers might want to consult it as well, for due diligence
direction. OCC examiners are encouraged to look at banks'
risk compliance, the security of their information systems,
and any customer complaints, as well as the strategic plans
of banks that offer CTFs. " Because the regulatory environment
is complex, and dedicated processing systems are
costly, providing retirement plan services requires a substantial
and long-term commitment, " the handbook states.
Given that the trustee serves as a regulatory backstop,
" it's important to understand the trustee's role, " Stewart
says. " For a given fund, is the trustee well-established, and
are CTFs a core business? Or are the trust services being
provided in-house by the asset manager as a sideline? "
Stewart also points out the consideration of critical
mass. " A manager may have a huge legacy mutual fund
product and create a CTF to follow the same strategy. But if
you map $50 million in cash into a new CTF with assets of
just $20 million, there might be a cash drag for a day or two
as the manager puts it to work, and that can [have a] significant
[impact on] performance. "
The extra homework for CTFs is not negligible, and there
are additional documents to sign. Stewart acknowledges
that, among his midsize plan clients, the majority of assets
still reside in mutual funds. " But enough has changed within
the industry that, in many cases, there are significant cost
savings on the table with CTFs-you can frequently save
10 basis points versus [with] an R6 share class-and on a
$100 million account that is real money, " he says. " We feel
an obligation to our clients to have the conversation about
all the available options. " -John Keefe
KEY TAKEAWAYS
* Because CTFs are institutional DC accounts, they have
the potential to deliver higher returns than mutual funds
will, allocating less to cash.
* CTFs can cross trades within their portfolios, thereby
sidestepping some transaction costs.
* Whereas mutual funds have set share classes, CFTs allow
for advisers to negotiate lower fees with the fund trustee.
planadviser.com September-October 2018 | 53
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