Understanding Collective Trust Funds and Their Benefits

Collective trust funds are a type of investment vehicle that pools money from multiple investors to achieve a common goal. This approach allows for economies of scale, making it a more cost-effective option for investors.

A collective trust fund is typically established by a trust company or a bank, which serves as the trustee and is responsible for managing the fund's assets. This setup provides a level of separation between the trustee's assets and the fund's assets, ensuring that the fund's investors have a clear and transparent investment experience.

By investing in a collective trust fund, individuals can gain access to a diversified portfolio of assets, which can help to reduce risk and increase potential returns.

A Collective Trust Fund is a type of investment vehicle that's sponsored and served by a trust company, in this case, Benefit Trust.

It's created under a Declaration of Trust and employs third-party managers for its operations. These managers are responsible for making investment decisions and overseeing the fund's performance.

The Collective Trust Fund is traded via the NSCC, a securities clearing organization. This allows for efficient buying and selling of fund shares.

The fund's operations are overseen by Benefit Trust, which provides active fiduciary oversight, allocation, custody, portfolio accounting, and transfer agent services.

Here are some key features of a Collective Trust Fund:

Collective trust funds offer several benefits and a unique structure that sets them apart from other investment vehicles.

One of the key benefits is lower operating costs, thanks to a straightforward structure and exemption from certain regulations.

The CIT model allows for a diversification of investments, which can lead to improved earnings and economies of scale for investment managers.

Investment managers can also take advantage of the flexibility to invest in a wide range of assets, including listed securities, mutual funds, ETFs, and alternative investment vehicles.

Here are some of the specific benefits of CITs:

The CIT structure allows for a convenient distribution of investments alongside separate accounts, mutual funds, and alternative products.

This can be a significant advantage for investment managers looking to expand their offerings and reach new markets.

To manage a collective trust fund, a bank must hold exclusive management over the fund, except when delegating responsibilities to others in a prudent manner. This is according to OCC Regulation 9.18(b)(2).

Delegating investment responsibility is allowed under the 1997 revised OCC regulation, but it comes with risks. If management delegates investment responsibility, the collective investment fund may lose its exemption from Federal securities law and exemption from Federal taxation.

Management must conduct a due diligence review of the investment advisor prior to delegation and closely monitor the advisor's performance after delegation. An agreement outlining each party's duties and responsibilities must be in place.

Investment managers engaged as sub-advisers to trusts in the CIT model gain flexibility in portfolio management.

This flexibility enables convenient distribution of CITs alongside separate accounts, mutual funds, and alternative products, allowing managers to diversify investments and improve earnings.

One of the key benefits of CITs is their cost structure, which is lower and more customized compared to traditional investment products.

Customized operating costs are based on a straightforward structure, regulatory status, and no 12b-1 fees, providing significant savings for investment managers.

Regulatory restrictions are also fewer, thanks to exemption from the 1940 Investment Company Act and SEC registration.

This exemption allows investment managers to operate with more freedom and flexibility.

Investment managers can invest in a wide range of assets, including listed securities, mutual funds, ETFs, and alternative investment vehicles.

This flexibility enables managers to tailor their investment strategies to meet the needs of their clients.

By investing in CITs, managers can also tap into the retirement market, increasing their opportunity for market share in the defined contribution industry.

Simplified marketing efforts are another benefit of CITs, as they are private offerings solely for qualified plans.

This eliminates the need for complex marketing and branding efforts, allowing managers to focus on what matters most - delivering strong investment returns.

Here are some of the key benefits of CITs for investment managers at a glance:

Investment Management Issues can be a complex topic, but understanding the basics can help you make informed decisions. It's essential to know that OCC Regulation 9.18(b)(2) requires banks to hold exclusive management over collective investment funds.

However, banks may delegate investment responsibility to outside advisors, but this must be done prudently. The OCC has stated that banks should conduct a due diligence review of the investment advisor prior to delegation and closely monitor their performance after delegation.

The bank's Board or its designee should approve the delegation and ensure that an agreement outlining each party's duties and responsibilities is in place. This agreement is crucial to avoid any potential issues.

Delegating investment responsibility can have implications under securities law and tax law. Management should review these implications with legal counsel prior to delegation.

Here are some key points to consider when delegating investment responsibility:

As you explore the world of investment and management, it's essential to understand the limits that apply to participant accounts. These limits can impact your investment strategy and overall financial goals.

In some cases, participant accounts may be subject to a maximum number of trades per quarter, which can be as low as 100 trades. This limit is designed to prevent excessive trading and promote more stable investment decisions.

You should also be aware that some participant accounts may have a minimum balance requirement, which can range from $1,000 to $5,000. This requirement ensures that the account is sufficiently funded to support the investment options available.

Participant accounts often have a maximum account value limit, which can be as high as $250,000. This limit helps prevent excessive investment risk and promotes a more balanced portfolio.

It's also worth noting that some participant accounts may have a limit on the number of assets that can be held in the account, which can be as low as 10 assets. This limit helps prevent over-diversification and promotes a more streamlined investment strategy.

In addition, participant accounts may have a limit on the type of assets that can be held in the account, such as limiting the number of mutual funds or exchange-traded funds (ETFs) that can be held. This limit helps prevent excessive risk and promotes a more conservative investment approach.

Banks that maintain collective trust funds (CIFs) are generally exempt from the Securities Act of 1933 and the Investment Company Act of 1940, but only if they strictly meet the exemption requirements.

If a bank doesn't meet these requirements, it would need to register the CIF as a security under the 1933 Act and as an investment company under the 1940 Act, which comes with additional regulatory requirements.

The Securities Act of 1933 requires registration of securities sold in interstate commerce to the public, with full and fair disclosure in connection with the offering.

Exemptions under the 1933 Act include Section 3(a)(2), which exempts certain securities from registration requirements.

The Investment Company Act of 1940 requires registration and regulation of investment companies, which are issuers that hold themselves out as primarily engaged in investing, reinvesting, or trading in securities.

Exemptions under the 1940 Act are also available, but banks must carefully assess their applicability to trust activities.

Here are the key exemptions under the 1933 and 1940 Acts:

The OCC Regulation 9.18 plays a crucial role in the CIT structure, ensuring that the funds created under the Declaration of Trust are regulated by the Office of the Comptroller of the Currency (OCC).

Benefit Trust, serving as Trustee of the CITs, is a bank as defined in §2(5) of the Investment Company Act of 1940, as amended.

The CITs are established to provide a vehicle for the efficient collective investment of assets of ERISA plans.

The Investors Master Trust for Employee Benefit Trusts is exempt from taxation under Code §501(a) and qualifies as a group trust under Revenue ruling 81-100.

Investment advisors appointed by Benefit Trust must be qualified to serve as an investment manager under §3(38) of ERISA.

Registration under securities laws can be a complex issue for banks that maintain collective investment funds (CIFs). Banks generally exempt from the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, but this exemption can be lost if the bank doesn't strictly meet the exemption requirements.

If a bank doesn't meet the exemption requirements, it would be required to register the CIF as a security under the 1933 Act and as an investment company under the 1940 Act. This can be a significant burden for banks, as it would require additional regulatory requirements.

The Securities Act of 1933 provides for the registration of securities sold in interstate commerce to the investing public, and requires issuers to make full and fair disclosure in connection with the offering of such securities. This act has exemptions, including Section 3(a)(2), which exempts from registration requirements and other provisions of the act.

The Investment Company Act of 1940 provides for the registration and regulation of investment companies. Under this act, an investment company is defined as an issuer that holds itself out as being primarily engaged in the business of investing, reinvesting, or trading in securities. This act also has exemptions, which are relevant when assessing the applicability of the act to the trust activities of banks.

Here are the key exemptions under the 1933 and 1940 Acts:

Banks generally seek to avoid registration of their CIFs due to the additional regulatory requirements imposed with registration. By understanding the exemptions under the 1933 and 1940 Acts, banks can better navigate the complex landscape of securities laws and regulations.

Custody and Valuation is a critical aspect of a collective trust fund.

The custodian maintains custody of trust assets and/or retirement accounts, ensuring their safekeeping and security.

A key responsibility is to settle underlying trades for the collective investment funds, which involves buying and selling securities to maintain the fund's asset allocation.

The custodian also calculates and provides periodic investment strategy performance for each fund, giving stakeholders a clear picture of the fund's performance over time.

Daily cash and security position reports are provided to investment option advisors, allowing them to make informed decisions.

The custodian maintains the official books of record for the trust funds, including a record of participating plans, which is essential for transparency and accuracy.

Reconciling cash and underlying position holdings daily ensures that the fund's assets are accurately accounted for.

The custodian determines the NAV (Net Asset Value) of each fund daily, which is crucial for pricing and valuation purposes.

Trust fund unit activity and daily NAVs are communicated to the NSCC (National Securities Clearing Corporation) and other interested parties, facilitating transparency and market efficiency.

Investment vehicle performance reporting and benchmarking help stakeholders evaluate the fund's performance relative to its peers and the market.

Shareholder servicing revenue is calculated, accrued, and remitted to recordkeepers or trading platforms for trust fund share and asset classes with a shareholder servicing revenue feature.

A collective trust fund can be merged with another fund to create a new, larger fund, as seen in the merger of two funds, resulting in a single, more diversified portfolio.

This type of merger can be beneficial for investors, as it allows them to pool their resources and invest in a wider range of assets.

Common Funds (CIFs) are a type of investment vehicle that can be used by employee benefit plans. ERISA implications are a key consideration when it comes to CIF operations.

ERISA Section 406 prohibited transaction rules apply to CIFs when employee benefit plan assets are invested in them. This means that certain transactions between the plan and the CIF or its related parties may be prohibited.

The DOL advisory opinion states that investment of plan assets in a CIF maintained by a bank trustee causes the assets of the CIF to be treated as assets of the plan. This has significant implications for the management and administration of the plan.

ERISA 408(b)(8) provides an exemption from the prohibitions outlined in ERISA Section 406 for certain transactions between the plan and the CIF. To qualify for this exemption, the plan must meet certain conditions.

Here are the conditions for the ERISA 408(b)(8) exemption:

DOL PTE 91-38 provides another exemption for certain transactions between the plan and plan-related parties. However, this exemption has its own set of conditions, including the requirement that the plan hold less than a 5 to 10% interest in the CIF's total assets.

Transactions between the plan and the bank or its affiliates are subject to ERISA Section 406 prohibitions and Internal Revenue Code 4975. However, the PTE 91-38 exemption can provide relief in certain circumstances.

A mutual fund can merge with a Collective Investment Fund (CIF) if the CIF is a registered scheme of the same mutual fund.

The merger must be approved by the mutual fund's board of directors and the Trustee.

The Trustee must also obtain approval from the Securities and Exchange Commission (SEC) before the merger can take place.

The merger is subject to the rules and regulations of the SEC and the mutual fund's trust deed.

The Trustee must ensure that the merger is fair and equitable to all unitholders.

The Trustee must also ensure that the merged entity continues to meet the requirements of a registered mutual fund.

The merged entity must continue to comply with all applicable laws and regulations.

The Trustee must keep a record of the merger and its implementation.

Investing in collective trust funds can be a bit complex, but it's essential to understand the rules. Banks may invest funds of fiduciary accounts in affiliate bank CIFs, but only if permitted in the governing instrument and allowed by state law.

For this to happen, several conditions must be met. The CIF plan of operation or governing document must authorize use of the CIF by accounts of affiliated banks, and the board of the affiliated bank must authorize the use of the originating bank's plan. The affiliated bank must also maintain documentation for all admission and withdrawal decisions for each fiduciary account invested in the originating bank's fund.

If a bank wants to invest in a non-affiliated institution CIF, things get trickier. The OCC has allowed it in the past, but the SEC has declined to issue a No-Action Letter on the same issue. In fact, the SEC has stated that banks should not invest customer funds in non-affiliated bank CIFs or accept investments from non-affiliated bank CIFs without first seeking an SEC No-Action ruling on the proposed activity.

Here are the key conditions for investing in affiliate bank CIFs:

Converting a CIF to a different type of investment can be a complex process, especially when it comes to ERISA implications. ERISA Section 406 prohibits certain transactions between employee benefit plan assets and CIFs.

If you're considering converting a CIF, it's essential to understand the ERISA implications. ERISA Section 408(b)(8) provides an exemption for certain transactions between a plan and a bank CIF, but only if the plan holds less than a 5 to 10% interest in the CIF's total assets.

To qualify for the exemption under PTE 91-38, the plan must also meet specific conditions, including holding less than a 5 to 10% interest in the CIF. This exemption precludes a violation of ERISA 406(a), but not ERISA 406(b)(1).

Transactions between a plan and a fiduciary, such as a bank trustee, are subject to ERISA 406(b)(1) and cannot be exempted under PTE 91-38. If the CIF purchases loans from the bank, for example, it would be in violation of ERISA 406(b)(1).

Here are some key conditions for relying on PTE 91-38:

Investing in Other Institutions' CIFs can be a complex issue, especially when it comes to investing in CIFs of non-affiliated institutions. Banks may invest fiduciary funds in CIFs of non-affiliated institutions, but the OCC staff has indicated that personal trust CIFs deriving tax-exemptions pursuant to IRC 584 cannot accept participations from non-affiliated institutions.

The SEC has declined to issue a No-Action Letter to Northern Trust Corporation on this issue, and the 1989 SEC No-Action letters to Northern Trust Corporation are located in Appendix G. This means that banks should not invest customer funds in non-affiliated bank CIFs or accept investments from non-affiliated bank CIFs without first seeking an SEC No-Action ruling on the proposed activity.

Banks wishing to invest in CIFs of non-affiliated institutions should be aware of the potential risks, including an SEC enforcement action, fines, and losses to the participating accounts. It's essential to carefully consider the potential consequences before investing in CIFs of non-affiliated institutions.

Here are the key conditions for investing in CIFs of affiliated institutions:

It's worth noting that investing in CIFs of non-affiliated institutions is generally not recommended, and banks should be cautious when considering such investments.

Collective trusts have been around for decades, but they've gained popularity in recent years, especially in the defined benefit and defined contribution markets.

They're commonly used for defined benefit plans and, when daily valuation is possible, for defined contribution plans. Collective trusts generally are excluded from the definition of an “investment company” under Section 3(c)(11) of the Investment Company Act of 1940.

This means that interests in these funds are generally exempt from registration under Section 3(a)(2) of the Securities Act of 1933.

Collective investment trusts (CITs) have seen a renewed surge in popularity in recent years. This trend is particularly noticeable in the defined benefit and defined contribution markets.

The CIT solution has been around since 1927, but its use has ebbed and flowed over the years. In fact, the share of assets held in CITs by 401(k) plans with 100 participants or more grew from six percent in 2000 to 17 percent in 2015.

CITs are commonly used for defined benefit plans and, when daily valuation is possible, for defined contribution plans. They are also excluded from the definition of an "investment company" under Section 3(c)(11) of the Investment Company Act of 1940.

Collective trusts pursue a wide variety of investment strategies across the equity and fixed income spectrum. These strategies may be passive or actively managed, and they often employ innovative investment techniques, such as investing in other investment vehicles or using exchange-traded funds.

CITs have gained market share in recent years, thanks in part to technological advances and a greater focus on retirement plan fees and full disclosure. This shift has made CITs a more attractive option for investors.

The CIT model offers a range of benefits for investment managers, including flexibility in portfolio management and convenient distribution of CITs alongside separate accounts, mutual funds, and alternative products.

Investment managers can gain substantial value through diversification of investments, improved earnings, and economies of scale. This is made possible by the CIT model's ability to engage investment managers as sub-advisers to the trusts.

A key advantage of CITs is their cost structure, which is lower and more customized compared to traditional investment vehicles. This is due to the straightforward structure and regulatory status of CITs, as well as the absence of 12b-1 fees.

CITs also offer regulatory flexibility, exempting them from the 1940 Investment Company Act and SEC registration. This results in fewer regulatory restrictions, making it easier to operate.

Investment managers can also tap into the retirement market with CITs, increasing their opportunity for market share in the defined contribution industry. This is a significant advantage, as the retirement market is a growing sector.

Here are some key benefits of CITs in a concise format:

Pooled investments have been around for a while, but their popularity has seen a surge in recent years. Collective investment trusts (CITs) have been in existence since 1927, and they've been gaining traction as more investment managers recognize their benefits.

CITs are a type of pooled investment vehicle that allows multiple investors to pool their funds together for investment purposes. This structure is designed to facilitate investment by combining fiduciary funds of various trust department accounts.

The administration of pooled investment vehicles, including CITs, must follow principles of prudent management and comply with applicable laws, regulations, and regulatory opinions. This includes maintaining proper documentation, recordkeeping, and accounting.

CITs offer flexibility in portfolio management, allowing investment managers to engage sub-advisers to the trusts. This creates a straightforward structure with lower operating costs and no 12b-1 fees.

Here are some key benefits of CITs:

Collective trust funds offer several advantages. They can provide economies of scale, which can lead to lower costs for investors.

One of the key benefits is low operating costs. This can make them an attractive option for those looking to invest.

Quick establishment is another advantage. Collective trusts can be set up quickly, which is often faster than other investment vehicles.

Flexible pricing and fees are also a benefit. This allows investors to choose the pricing structure that works best for them.

Collective trusts can also offer diversification, which can help spread out risk. This can be especially beneficial for those who are new to investing.

However, there are also some disadvantages. One of the main drawbacks is less transparency than traditional mutual funds.

Difficulty tracking performance is another con. It can be hard to keep up with the performance of a collective trust.

Less oversight of management is also a concern. Collective trusts may not have the same level of oversight as other investment vehicles.

Finally, collective trusts cannot be rolled over to an Individual Retirement Account. This can limit their use for retirement savings.