Collective Investment Trusts and My Retirement

Tom –

Just got a letter in the mail that, effective 27 Jun 2011, “the company’s Target Date Funds will transition from mutual funds to collective trusts. The collective trusts will offer you the same investment strategy and risk, but the overall expenses will be lower – which is where participants save! As a result of this change the expense ratio will change.”

Exactly what’s changing here? How should I feel about this – Happy? Mad? Indifferent?

Great question!

You currently own a target date retirement fund. The target date retirement fund is a “hybrid” mutual fund which automatically resets its asset mix (stocks, bonds, cash equivalents) in its portfolio according to a selected time frame, e.g. a 2040 fund. Managers of target date funds typically use time horizon rather than risk tolerance or investment objective to determine the fund’s asset allocation. Typically, the further out the target date, the more the manager invests in stock. As the target date fund approaches its “target date,” the manager will reduce the percent invested in stock based upon a pre-determined “glide path” or allocation.

A collective trust is not a mutual fund. Collective trusts are pooled investment vehicles and unlike mutual funds, they may only be offered by a bank or a trust company. Additionally, collective trusts are only available to qualified plans (your 401(k)) and certain governmental plans used to supplement retirement. As such they are not available to retail investors.

Other items of note regarding collective trusts: a collective trust has a fiduciary structure (bank or a trust company), and by definition must rise to a higher administrative standard than a mutual fund; because the trust is not available to retail customers, their fees do tend to be lower than that of a mutual fund; a collective trust has the ability to invest in alternative or non-correlated asset classes.

My vote would be for happy.

Huzzah!

Tom