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Grow Your Practice with Customized Collective Trusts for 401K Model Portfolio
1. STRONGER
together
Strategies
for success
2015 Partner Conference
Bringing Value to Your
Practice and Your
Clients 401(k) Plan by
using
Collective Investment
Trust Funds
David Hand, CEO
Hand Benefits & Trust, a BPAS Company
2. 2015 Partner ConferenceStronger Together
Table of Contents
• History of Collective Trust Funds
• Benefits of Using Collective Trust Funds
• Opportunities in Collective Trust Space
• Model Portfolios
• Customized Solutions
• MET and MEP
• Using Collective Trust Funds in Model Portfolios and Custom Solutions
• 2015 Fiduciary Regulations
3. 2015 Partner ConferenceStronger Together
History of Collective Trust Funds
• 1927-CTF’s 1st introduced
• 1936-CTF use expanded in DB plans
• 1955-CTF use grew when FED gave authorization to banks to
combine assets from pensions, profit sharing and stock bonus plans
and the IRS gave those CTF’s an IRS determination to be tax exempt
• 2000-CTF’s began trading on the NSCC’s Fund/SERV platform
• 2012-DOL requires plan administrators to standardized strategy, risk,
performance and expense disclosures for plan participants for
comparative purposes
4. 2015 Partner ConferenceStronger Together
1927 • CTFs introduced
1936 • CTF use expanded in DB plans
1955
• CTF use grew when FED gave authorization to banks to combine
assets from pensions, profit sharing and stock bonus plans and the
IRS gave those CTFs an IRS determination to be tax exempt
2000 • CTFs began trading on the NSCC’s Fund/SERV platform
2012
• DOL requires plan administrators to standardized strategy, risk,
performance and expense disclosures for plan participants for
comparative purposes
History of Collective Trust Funds
5. 2015 Partner ConferenceStronger Together
What Are Collective Trust Funds
• CTFs are pooled investment vehicles organized as trusts and
maintained by combining assets from eligible investors into a single
investment portfolio (or fund) with a specific investment strategy.
• By pooling the assets, the CTF sponsor may take advantage of
economy of scales to offer lower overall expenses, enhanced risk
management and more diverse/innovative investment solutions for
their investors .
6. 2015 Partner ConferenceStronger Together
Where Can Collective Trust Funds Be Used
• Generally speaking, Collective Trust Funds are only utilized in ERISA
qualified pension plans, defined benefit and defined contribution plans
• Collective Trust Funds can be used in the following types of plans:
401(k), 401(a), 457(b), Profit Sharing and Defined Benefit Plans
• CTFs can be used in 403(b)(9) Church Plans and plans in Puerto Rico
• Collective Trust Funds cannot be used in IRAs, 403(b), 457(f) and Keoghs
• CTFs can be used in certain types of Insurance Annuity Contracts
7. 2015 Partner ConferenceStronger Together
Collective Investment Trust Funds
vs. Mutual Funds
• Pooled vehicle
• Daily valued
• NSCC traded
• Fact sheets
available
• Professionally
managed
• Daily liquidity
• Qualified plans only
• Declaration of trust
• OCC regulated
• Held to ERISA
fiduciary
standard
• Data provided by
manager
• Institutional pricing
• All investors
• Prospectus
• SEC regulated
• No ERISA fiduciary
standards
• Data publicly
available
• Institutional & retail
pricing
Collective Investment Trust Fund Mutual Funds
8. 2015 Partner ConferenceStronger Together
Benefits of Collective Trust Funds
Low Cost
Fiduciary
Investment Options
Distribution Brand
Audit – Returns
Scale--NSCC Fund Serve,
Charles Schwab, Fidelity
10. 2015 Partner ConferenceStronger Together
Future of Collective Trusts
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
2016 2017 2018 2019 2020 2021
CITTotalAUM(trillions)
"BICE" "Alt Assets"
2nd Gen
Target
403(b)
Church Plan
403(b)?
IRA?
11. 2015 Partner ConferenceStronger Together
Trading Platforms
• STN – MidAtlantic Capital
• Charles Schwab Trust Company
• Matrix – MG Trust Company
• Reliance Trust Company
• Wilmington Trust Company
• BPAS
• Wells Fargo Bank (Wachovia Bank)
• TD Ameritrade
• Frontier Trust Company
• SEI Private Trust Company
• Great West (GWFS / GWRS)
• BMO Harris
Sample list of trading platforms the funds are available?
12. 2015 Partner ConferenceStronger Together
Areas of Opportunities for CTFs
• Model Portfolios
• Custom Solutions
• MEP and MPT
13. 2015 Partner ConferenceStronger Together
Model Portfolio Fiduciary Regulations-Transparency
• Investment Disclosures must include the relevant
information for every DIA under the plan
• Standardized Performance Information
• Total Annual Operating Expenses must be disclosed as
percent of investment assets as well as dollar amount for a
$1,000 investment
14. 2015 Partner ConferenceStronger Together
Model Portfolio Fiduciary Regulations-Transparency
• Provide the comparative chart which also includes the
investment objectives, principal strategies, portfolio
turnover ratio, and quarterly updates for performance
date and fee and expense information
• BPAS White Paper – Must Read:
• bpas.com/media/hbt/Models_Wagner_WhitePaper.pdf
15. 2015 Partner ConferenceStronger Together
Model Portfolio Restrictions
• Cannot Use Investment that are not Core
Investments
• No Audit Returns
• Compliance with QDIA Requirements – Fund
Fact Sheets
• No Scale Across Plans or Recordkeepers
16. 2015 Partner ConferenceStronger Together
Unit Models vs. Collective Trust
Unit Models Collective Trust
• “Unit Value” Per Plan Per Fund Only
• One Custodian Only
• No Audit
• Limited to Plan Document
• QDIA – Limited to Disclosures Per Plan
• CUSIP Across All Plans – “Mutual Fund
Type Structure”
• NSCC- Fund Serve Across All Broker
Dealers
• Audited Returns
• Exempt from SEC Registration
• All across all plans Morningstar, New
Kirk, Electronic Feed
to Record Keeper
17. 2015 Partner ConferenceStronger Together
Model Portfolios
• Target-Date and Target-Risk Funds
— Popular default investments for DC plans
— Many are “prepackaged” funds
— One size fits all
18. 2015 Partner ConferenceStronger Together
Model Portfolios
• Next Phase of Evolution - Custom Solutions
— Tailored to advisors’ investment strategies
— Greater investment flexibility
— Eliminate potential conflicts
— Access to lower costs
— Open Architecture
19. 2015 Partner ConferenceStronger Together
Use of CTFs with Model Portfolios
• CIF’s bank trustee may partner with third-party
advisors (e.g., RIA firm)
— For example, RIA advises plan clients on their DIAs
— CIF is created using same DIAs as custom solution
— RIA advises bank trustee on CIF’s underlying portfolio
20. 2015 Partner ConferenceStronger Together
Use of CTFs with Model Portfolios
• SEC Exemption
— Requirements under ICA Section 3(c)(11) and Securities
Act Section 3(a)(2).
— Requires bank trustee to exercise “substantial investment
responsibility.”
— Bank trustee must have final authority over following RIA’s
advice.
21. 2015 Partner ConferenceStronger Together
Case Study – Fiduciary Problems
Primary Business - Investment Models – Risk Based
• Who is Fiduciary 3(38) to Models?
— Plan Sponsor vs Advisor
• 404(c) Issues
— Educational Models vs Discretionary Models
22. 2015 Partner ConferenceStronger Together
Case Study
Observations: Underlying cost of
Investment Funds
RIA/RK Model 23bps
HB&T CTF Solution 11bps
Net Savings 12bps
Passive (US + Alts)
13bps
7bps
6bps
23. 2015 Partner ConferenceStronger Together
Case Study
Inst Share R-1 R-2
Advisor Comp 15bps 40bps 40bps
Underlying Funds 11bps 11bps 11bps
Trustee 6bps 8bps 8bps
Revenue Share -0- -0- 25bps
Total Expense 32bps 59bps 84bps
24. 2015 Partner ConferenceStronger Together
2015 Fiduciary Regulations
• Transparency
• Unconflicted Advice
• Best Interest Contract Exemption
— 408(b)8
— Computer Model
— Advice vs Education
