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Some Funds in Your 401(k) Aren’t Really Mutual Funds After All
Collective investment trusts, or CITs, have lower fees but less
transparency
![](WSJ%2020150925%20-%201x40.png)
Fidelity Investments has joined a growing number of companies
using collective-trust versions of actively managed mutual
funds. The fees on the trusts are about 25% to 50% below the
lowest-cost shares of the mutual funds. PHOTO: BRIAN
SNYDER/REUTERS |
By
Anne Tergesen
Sept. 25, 2015 5:30 a.m. ET
Don’t look now, but the
mutual funds in your 401(k) may not be mutual funds after all.
In recent years, more
401(k) plans have replaced the mutual funds in their investment
lineups with collective investment trusts. These investments look and
act a lot like mutual funds, but generally have lower fees and
disclose less about their inner workings to 401(k) participants.
Also known as collective
trust funds, such investments currently account for $2.4 trillion, or
16%, of the $15 trillion in 401(k)-style and pension plans, up from
$1.3 trillion (and 12.7% of the total) in 2009, according to the
Investment Company Institute and Cerulli Associates, a research firm
that specializes in the asset-management industry. The trusts are
accounts available only to retirement plans. They are sponsored by
banks and trust companies and are primarily overseen by banking
regulators, rather than subject to mutual-fund rules enforced by the
Securities and Exchange Commission.
By and large, experts
say, the trend has been positive for 401(k) investors. For 401(k)s,
“collective trusts are often the lowest-cost option on the market,”
says Nathan Voris, director of sponsor and workplace investments at
Morningstar Inc.
Many collective trusts
track indexes, like index mutual funds. Over the past two years,
Fidelity Investments joined a growing number of companies introducing
collective-trust versions of actively managed mutual funds, when it
made the move with eight funds, including Fidelity Contrafund and
Fidelity Low-Priced Stock Fund. The fees on the trusts can “be as much
as 0.2 or 0.3 percentage points” cheaper than the shares of the mutual
funds, says Chuck Black, Fidelity’s senior vice president of
investment services.
Savings of that
magnitude aren’t unusual. According to investment consulting firm
Callan Associates Inc., participants in 401(k) plans with $1 billion
in assets pay an average of 1.01% in fees for an investment lineup of
retail mutual funds. Average participant costs decline—to 0.85%—when
these plans use institutional share classes of the same mutual funds,
an option available to most 401(k) plans, says Lori Lucas,
defined-contribution practice leader. But with collective trusts,
average costs fall to 0.54%—“almost half the retail price,” she adds.
Collective trusts’ cost
advantages stem mainly from the fact that they are exempt from the
Investment Company Act of 1940, which governs mutual funds. Funds are
required to deliver prospectuses and periodic reports to investors, as
well as to make certain filings to the SEC. Without those rules,
trusts save on legal and distribution costs, attorneys say.
Because of their
narrower audience, collective trusts also typically spend less on
marketing than mutual funds, Mr. Voris says.
The trusts’ low expenses
are attractive to employers seeking to reduce 401(k) participants’
costs amid a wave of litigation over high 401(k) fees and the 2012
introduction of federal regulations that mandate 401(k) fee disclosure
to participants.
Collective trusts—which
have been around since the 1920s—are most commonly used by the biggest
401(k) plans. But they have become accessible even to midsize 401(k)
plans with $100 million in assets or more, says Drew Billingsley, vice
president at American Century Investments. The Kansas City investment
company began offering collective trusts to 401(k)-style plans in 2007
and this summer reduced the minimum required investment on its
target-date collective trusts from $50 million to $15 million.
Still, the trusts’ lower
fees come with trade-offs. Collective trusts don’t have ticker
symbols, and 401(k) participants can’t track their performance or
compare them with other investments using public websites including
Morningstar.com, Yahoo Finance, and newspapers such as The Wall Street
Journal, which publish mutual-fund performance data.
Moreover, while
mutual-fund investors can simply download fund prospectuses and other
standardized materials from fund-company websites, 401(k) participants
in collective trusts may have to request similarly detailed documents
from their 401(k) plan or the company running the trust.
In comparison with
mutual funds, collective trusts are “less transparent,” says Brooks
Herman, head of data and research at BrightScope Inc., which tracks
401(k) plans. “It’s the tradeoff people are willing to make for their
lower fees.”
Still, as collective
trusts have caught on with 401(k) plans in recent years, many have
increased voluntary disclosures to 401(k) participants. While
collective trusts are not required to provide daily pricing, that has
become a standard feature.
On websites for 401(k)
plan participants, the information about trusts may look a lot like
that on funds. That is partly a function of trusts increasingly being
provided by banking units of big asset managers and 401(k) record
keepers.
‘Collective trusts don’t have ticker symbols, and 401(k)
participants can’t track their performance or compare them with
other investments.’
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Many plan administrators
publish fact sheets that disclose information including a collective
trust’s performance and top holdings. Invesco Ltd.’s trust company,
which sponsors 45 collective trusts with approximately $60 billion in
assets, updates holdings on a monthly basis, says senior vice
president Betsy Warrick. For its collective trusts, Fidelity publishes
a document that resembles a slimmed-down prospectus, says Mr. Black.
“There is a movement
among trust sponsors to make their products look more like mutual
funds,” says Ms. Lucas. “More and more trusts are offering
prospectus-like documents. They recognized that plan sponsors and
participants want that level of transparency.”
Under the federal rules
for 401(k) fee disclosure, meanwhile, plans must disclose in annual
statements distributed to participants the cost to workers of
investing in the plans and the performance of the investment options,
including any collective trusts.
Collective trusts must
also issue certain disclosure documents to employers. Examples include
an audited annual financial statement detailing the collective trust’s
fiscal year-end holdings or a document—often called an offering
memorandum or an offering circular—that broadly resembles a
mutual-fund prospectus, according to John Schadl, principal and head
of Vanguard Group’s Erisa and Fiduciary Services.
Many of those documents
are available to 401(k) participants upon request, he adds.
Write to
Anne Tergesen at
anne.tergesen@wsj.com
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