Collective trust funds, also called collective investment trusts, represent an alternative investment vehicle to mutual funds for qualified retirement plan investment options. Both are investment vehicles comprised of pooled assets invested in securities according to a pre-determined strategy to meet a specified objective.

What are collective trust funds?

Collective trust funds or collective investment trusts are defined by who regulates the investments, who is able to offer them, who they can be offered to and their registration exemption status.

Who can offer them?

Collective trust products are sponsored and maintained by a bank trust department or a trust company.

The primary regulator for collective trusts is the Department of Treasury / Office of the Comptroller of the Currency (OCC) pursuant to OCC Regulation 9.18 rather than the Securities and Exchange Commission (SEC). The Department of Labor also has oversight for the funds through its oversight of ERISA Plans.

Registration Exemption

The key difference between collective trusts and mutual funds is that collective trusts are exempt from the investment company registration requirements of the Investment Company Act of 1940 and the securities registration requirements of the Securities Act of 1933. These exemptions are available because collective trust funds are not available to the general public. They can only be offered by a bank to certain qualified employee retirement plans. The reasoning is that qualified plans do not require the protection of registration because individual investors / plan participants are already protected through other fiduciaries. In addition to the trustee for the collective trust funds who acts as fiduciary for all fund investors, individual plan participants investing in the funds are also protected by an independent plan fiduciary, usually the plan sponsor.

Eligibility: Who can invest?

As previously noted, collective 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 Benefit

• Pension Plans
• 457 Plans
• Cash Balance Plans
• Master Trusts
• Insurance Separate Accounts
• Taft-Hartley Plans

Suitability: Who are collective trust funds best suited for?

Collective trust funds are best suited for retirement plans that are too large to use a mutual fund but do not have the assets to support a large institutional separate account fee, custody bill and unitization services. They are also suitable for retirement plans that may have the size to support an institutional separate account but do not wish to assume the burden that comes with ownership of securities in a fund such as foreign sub TA fees and ISDA filings. Because collective trust funds do not have the same restrictions as mutual funds have on investing in alternatives or derivatives, they are well suited to plans seeking exposure to pure alternative investment markets such as commodities, real estate, bank loans or absolute return strategies.

Key Differences to be aware of