A new view of A time-tested solution

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1 ColleCtive trust Collective Trust FundsResource Guide FundsResource Guide A new view of A time-tested solution to help you control retirement plan costs 2nd Edition 2nd Edition Beyond pricing choosing between collective trust funds and mutual funds evaluating providers regulation And controlling Authorities

2 Choosing the right pension plan demands a thorough understanding of the available options. Pricing, market trends, trading and operational considerations, regulations, and other essential characteristics must all be considered in the context of your organizational objectives. For many plan sponsors, prevailing economic conditions have driven cost considerations to the top of the priority list. This guide is designed to provide plan sponsors with a framework for evaluating the potential benefits of collective trust funds, as well as how they compare to mutual funds. Time-tested and highly flexible, CTFs can offer significant value to many retirement plans, especially in terms of cost reductions. We trust you will find the facts presented in this guide to be both informative and beneficial. To request additional copies of this guide or to speak to a representative, contact your financial advisor or call the Victory Investment Professional line at victoryconnect.com This guide is intended to provide accurate and authoritative information in regard to the subject matter covered. It is presented and published with the understanding that the author and publisher are not engaged in rendering legal or other professional service or advice. If legal advice or other expert assistance is required, the services of a competent expert should be sought. No part of this guide may be changed or reproduced without the permission of Victory Capital Management Inc. Victory Capital Management Inc. is a registered investment adviser and a wholly owned subsidiary of KeyBank N.A. 1

3 Collective Trust Funds Resource Guide Contents 1 What is a collective trust fund? 5 2 Cost advantages and comparisons 11 3 Beyond pricing: choosing between collective trust funds and mutual funds 15 4 Evaluating providers 18 5 Establishing a collective trust fund: regulations and controlling authorities 19 6 Documentation and agreements 22 7 Summary 23 Glossary 24 3

4 Collective trust funds offer many important advantages CTFs can deliver significant cost advantages, with fee structures that can be as much as 25% lower than mutual funds. An often-overlooked investment vehicle with an 80-year history is now getting a lot of attention from retirement plan sponsors and for good reason. Once dominant in the 401(k) arena, collective trust funds have returned to prominence and for a number of very compelling reasons. For starters, today s CTFs are more flexible, more transparent, and more accessible than ever before. They re also delivered more efficiently and are available in a wider range of investment styles. Their growing popularity is also driven by an increased focus on plan expenses. It s no secret that fees have a major impact on returns, directly affecting the assets participants accumulate for retirement. And because investment fees represent the largest plan expense, understanding and evaluating the various types of investment vehicles is critical. One of the fundamental responsibilities of fiduciaries under the Employee Retirement Income Security Act (ERISA) is defraying reasonable expenses of administering the plan. So in cases where two products are managed identically and a plan is eligible to use a more costeffective CTF, it should be given serious consideration. CTFs can deliver significant cost advantages, with fee structures that can be as much as 25% lower than mutual funds. The renewed appeal of CTFs extends beyond cost. The breadth of investment offerings in these vehicles has grown markedly in recent years, and operational enhancements including automated settlement of trades, daily valuation, performance data, holdings reports, and commentaries have made CTFs outstanding choices for many defined contribution plans. CTFs also offer the benefit of providing access to institutional and boutique investment managers. 4

5 1 What is a collective trust fund? did You Know? The first collective investment was offered in 1927, possibly predating the first public offering of a mutual fund by a year or more. A collective trust fund (CTF) is a tax-exempt, pooled investment vehicle. Administered by banks and trust companies, CTFs are available to defined benefit and defined contribution plans. While many banks establish commingled funds for smaller personal or charitable trusts, CTFs are authorized by the Office of the Comptroller of the Currency (OCC) to consist solely of assets that are exempt from federal income tax. These include retirement, pension, profit-sharing, stock bonus, or other trusts. CTFs are also known as A2 funds, referring to the section in OCC rules that defines them. Variations on the Theme CTFs can also be maintained exclusively for the collective investment and reinvestment of money contributed to the fund by the bank, or by one or more affiliated banks, in its capacity as trustee, executor, administrator, guardian, or custodian under a Uniform Gifts to Minors Act. This type of fund is generally referred to as an A1 fund. Yet another variant of the CTF, the Collective Investment Trust (CIT), is in some ways similar to a mutual fund. However, unlike mutual funds, CITs are unregistered investment vehicles (not registered with the SEC or FSA), which are available only to institutional investors, often hold asset classes and investments different from mutual funds (such as direct real estate), are primarily and increasingly provided through qualified retirement plans, and are not marketed to individuals. In North America, CITs are also know as collective trusts, commingled funds, collective investment funds, managed investment schemes, collective investment schemes, and, occasionally, as private funds. How They Work Like other types of pooled investments, CTFs are designed to improve the investment management process and help mitigate risk by combining assets from different accounts into a single fund with a defined investment strategy. Professional portfolio managers develop and implement strategies tailored to the requirements of each individual CTF. Because assets are pooled, investors gain the cost benefit of increased scale, while investment performance and risk management are enhanced through diversification. Returns are calculated net of expenses, may be displayed gross and/or net of management fees, and may be printed or illustrated with benchmark returns, similar to mutual funds. 5 Each CTF is established under a plan that specifies how the bank manages and administers the fund s assets. The bank serves as fiduciary and holds legal title to the assets. The beneficial owners of the fund s assets are the participating investors, and the plan sponsor s investment in a CTF is called a participating interest. Each participating investor has an interest in the total assets of the investment vehicle, but no individual directly owns any specific asset held by the CTF. CTFs at a glance Pooled investment vehicle Designed for use solely in qualified retirement plans Bank or trust company acts as fiduciary Regulated by Office of Comptroller of the Currency and subject to oversight by the IRS and the Department of Labor As is the case with other fiduciary assets, participating interests in a CTF are not FDIC-insured. In addition, participating interests in a CTF are not subject to potential claims by a bank s creditors, and not overseen by the SEC which explains why there are so many disparate names for these investment vehicles. Diversity and Regulation CTFs are now offered in an extensive range of investment strategies. While CTFs available for defined contribution plans were at one time largely stable-value or passive investments (also known as index strategies), offerings today include a full assortment of equity and fixed-income asset classes and styles, including specialty products.

6 Collective funds and mutual funds have different regulatory requirements, overseeing agencies and investment criteria. Exempt from registration with the Securities Exchange Commission (SEC) under the Investment Company Act of 1940 ( 40 Act), CTFs are subject to regulation by the OCC and oversight by the IRS and the Department of Labor (DOL). A detailed review of controlling authorities and regulations is provided in Section 5. CTFs: A Long History The first collective investment was offered in 1927, possibly predating the first public offering of a mutual fund by a year or more. In 1936, Congress amended the Internal Revenue Code to provide tax-exempt status to certain bank-administered collective investment funds. Then, in 1955, the Federal Reserve authorized banks to pool funds from pension, profit sharing, and stock bonus plans, and the IRS subsequently ruled that such funds could be tax-exempt. As a result, CTFs became popular for use in employer-sponsored defined benefit plans, the dominant retirement vehicle at the time and in the decades that immediately followed. The Introduction of 401(k) Plans and Market Acceptance of Mutual Funds The retirement-savings landscape began to change in the 1980s with the arrival of the first 401(k) programs. Although CTFs were used in early 401(k)s, mutual funds quickly made inroads. Mutual funds offered ready-made solutions and features that accommodated savings plans that required far higher levels of client service than CTFs had been structured to provide. Mutual funds already had daily valuation and automated trading capabilities in place, along with a framework geared to serving thousands of retail clients. Mutual fund companies also marketed a wide range of investment strategies that participants could track in the news media, and name recognition added considerably to their widespread acceptance. 401(k) assets were modest early on, as many companies viewed them principally as supplements to their existing pension plans. As the 1980s progressed, however, 401(k) assets grew rapidly. Many employers began offering defined contribution plans to new employees as the primary retirement savings vehicle, while freezing pension plans. Employers without defined benefit plans and startup firms increasingly opted to offer only 401(k)s. Defined Contribution Plans: A Shift in Investment Vehicle Usage 100% 90% 80% 70% Percent of plans that now use: 11% 72% 65% +8% 80% % 50% 40% 30% 54% 32% +13% 45% 24% +5% 29% 20% 10% 0% Retail Mutual Funds Institutional Mutual Funds Commingled Funds (CITs) Separate Accounts Numbers may add to more than 100% due to use of multiple types of investment vehicles 6 Source: Greenwich Associates, 2009

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