CITs & Group Trusts Simplifying and Scaling Retirement Plans - - PowerPoint PPT Presentation

CITs & Group Trusts

Simplifying and Scaling Retirement Plans

Current Industry Trends

Aggregation/ Consolidation

Fee

C

• m

p r e s s i

• n

Current State of Retirement Industry

1) Having the qualifications is not enough to distinguish yourself anymore 2) Retirement Advisory and Recordkeeping is becoming commoditized

• W h en so meth in g bec o mes a c o mmo d ity an d th ere is n o

d ifferen tiatio n betw een pro d uc ts th en th e o n ly plac e to c o mpe te i s o n pri c e .

The Power of CITs & Group Trusts

Unlock Economies of Scale Clear, Tangible & Simple Process Differentiate Yourself

CITs & Group Trusts

1981 IRS Revenue Ruling 81-100

How are you able to Pool Assets and not Create a Mutual Fund?

Investment Company Act of 1940 section 3(c)(11)

“Any employee’s stock bonus, pension, or profit-sharing trust which meets the requirements for qualification under section 401 of the Internal Revenue Code of 1986; or any governmental plan described in section 3(a)(2)(C) of the Securities Act of 1933; or any collective trust fund

maintained by a bank consisting solely of assets of one or more of such trusts, government plans, or church plans, companies or accounts that are excluded from the definition of an investment company under paragraph (14) of this subsection; or any separate account the assets of which are derived solely from (A) contributions under pension or profit-sharing plans which meet the requirements of section 401 of the Internal Revenue Code of 1986 or the requirements for deduction of the employer’s contribution under section 404(a)(2) of such Code, (B) contributions under governmental plans in connection with which interests, participations, or securities are exempted from the registration provisions of section 5 of the Securities Act of 1933 by section 3(a)(2)(C) of such Act, and (C) advances made by an insurance company in connection with the operation of such separate account.”

Investment Company Act of 1940 section 2(5)

(5) ‘‘Bank’’ means: (A) a depository institution (as defined in section 3 of the Federal Deposit Insurance Act) or a branch or agency of a foreign bank (as such terms are defined in section 1(b) of the International Banking Act of 1978) (B) a member bank of the Federal Reserve System

(C) any other banking institution or trust company, whether incorporated or not, doing business under the laws of any State or of the

United States, a substantial portion of the business of which consists of receiving deposits or exercising fiduciary powers similar to those permitted to national banks under the authority of the Comptroller of the Currency, and which is supervised and examined by State or Federal authority having supervision over banks, and which is not operated for the purpose of evading the provisions of this title (D) a receiver, conservator, or other liquidating agent of any institution or firm included in clause (A), (B), or (C) of this paragraph.”

“Bank-maintained” under the federal securities laws has been interpreted by the SEC to mean “substantial investment responsibility”.

Plans Available to CITs and 81-100 Group Trusts

401(k) Profit sharing Defined Benefit 457(b) Cash Balance Money Purchase Plans 403(b)(9) Taft-Hartley State Municipal or Government

Collective Investment Trusts

• E s t a b l i s h e d i n 1 9 2 7
• A l s o r e f e r r e d t o a s C o l l e c t i v e I n v e s t m e n t T r u s t s a n d C o l l e c t i v e T r u s t F u n d s
• H i s t o r i c a l l y t h e p r e f e r r e d r e t i r e m e n t v e h i c l e
• B a n k s p o n s o r e d a n d t h e r e f o r e e x e m p t f r o m ’ 4 0 A c t r e g i s t r a t i o n
• T r u s t b a s e d
• B o a r d o f D i r e c t o r s o f t h e B a n k o v e r s e e t h e T r u s t
• B a n k a n d I n v e s t m e n t M a n a g e r a r e b o t h E R I S A f i d u c i a r i e s
• O n l y a v a i l a b l e t o q u a l i f i e d r e t i r e m e n t T r u s t s
• 4 0 1 k • 4 0 1 ( a ) / P r o f i t S h a r i n g • D e f i n e d B e n e f i t / P e n s i o n • T a f t - H a r t l e y
• 4 0 3 b ( 9 ) -

C h u r c h S p o n s o r e d P l a n s • 4 5 7 ( b ) • S t o c k B o n u s • I n s u r a n c e C o . S e p a r a t e A c c o u n t s

• C a s h B a l a n c e P l a n s • S t a t e a n d M u n i c i p a l R e t i r e m e n t P l a n s
• C I T s t r a d e o n t h e N S C C a s o f M a r c h o f 2 0 0 0
• M o r n i n g s t a r C I T d a t a b a s e e s t a b l i s h e d i n 2 0 0 7
• L e v e r a g e t h e s e l l i n g a g r e e m e n t s o f t h e B a n k s p o n s o r
• N o p a y t o p l a y p l a t f o r m s c h e m e s

CIT TRENDS

CIT asse ts are e sti mate d to surpass $ 3 tri l l i o n by th e e n d o f 2 0 1 8

C I F a s s e t g r o w t h h a s e x c e e d e d t h e o v e r a l l r e t i r e m e n t m a r k e t w i t h a 7 - y e a r C A G R o f 1 4 . 4 % c o m p a r e d t o 9 % f o r t h e r e t i r e m e n t m a r k e t .

Source: Erach Desai and Jason Dauwen. DST Systems and ALPS. Collective Investment Trust – A Perfect Storm, March 2017.

S i n c e 2 0 1 2 , CIT use h as g ro w n by 3 5 % w i th i n DC pl an s, w h i l e th e usag e o f mutual fun d s h as d ec reased .

Source: Callan 2017 DC Trends Survey

Use of CITs in DC Plans Booming, Rises 68% Since 2008

“In a December 2015 survey by Cerulli, 18.8% of DC plan executives said they would convert mutual funds to collective investment trusts when asked if they planned to change their investment structures over the next 12 years.”

• Pnesion & Investments, February 22, 2016

CITs Continue Growth

“Collective investment trusts are still climbing – both in use and in offerings.”

• Benefits Pro, January 29, 2016

The ‘Explosion’ of Collective Trusts in 401ks

“Plan sponsors thought they had to be big to use CITs; not true...”

• 401k Specialists,, February 23, 2016

CIT Adoption on the Rise in DC Plans

“The potential pricing flexibility and cost advantages that CITs offer when compared with other investment vehicles are translating into a rising demand in the DC market. Of the 100 largest corporate DC funds in 2016, CITs were used by 54.3%, more than mutual funds, separate accounts and ETFs combined.”

• Pnesion & Investments, February 23, 2017

Scale Investment Strategies Efficiently

Reduce investment costs

Simplify Model Management

Principal Use Cases for CITs

Scale Investment Strategies

One Trading Account Daily NAVs Operationally similar to mutual funds Fee Flexibility Investment Holding Flexibility

Reduce Investment Costs

• CIT vs MF -

Callan 2018 Defined Contribution Trends Survey

10 20 30 40 50 60 70 80 90 100 US LargeCap Core International Equity Target Date Funds US Core Investment Grade

TER (bps)*

CITs Mutual Funds

*assuming $100 MM

401k and ERISA-covered 403b plans through September 2016. Source: Investment News analysis of Groom Law Group data

ERISA LITIGATION

Number of retirement-fee-cases filed annually

5 10 15 20 25 30 35 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006

Notable Cases:

• Boeing
• Anthem
• Nordstrom
• Lockheed Martin Corp
• Tibble v. Edison (U.S. Supreme Court)

= Settlements over $300 million

Simplify Model Management

Recordkeeper Models

Model in CITs

Multiple Accounts

One Account

Notifications when new securities are traded

No notifications to participants for trading new securities

Limitation on the types of securities that can be held in the model

Expanded available securities

Varying Performance

Consistent Performance

What is an 81-100 Group Trust?

Record Keeper Investment Manager

Custodian

81-100 GROUP TRUST

Plan Plan Plan Plan Plan Plan

Trust Trust Trust

T r u s t Trust Trust

MEPS vs 81-100 Group Trust

M E P

81-100 GROUP TRUST

M E P

81-100 GROUP TRUST

Plan Specifications Plan Specifications Plan Assets Plan Assets

Does each plan still need its own trust?

81-100 GROUP TRUST

Plan Plan Plan Plan Plan Plan T r u s t T r u s t T r u s t T r u s t T r u s t Trus t MEPS

Record Keeper Investment Manager

Custodian 81-100 GROUP TRUST

Trust Trust Trust

T r u s t Trust Trust Plan Advisor Plan Advisor Plan Advisor Plan Advisor Plan Advisor Plan Advisor Plan Plan Plan Plan Plan Plan

81-100 GROUP TRUST

Small plan solution

ASSOCIATION GROUP TRUST

Associations

• r

Groups

Member

401(k) 401(k) 401(k) 401(k)

Member Member Member

Association

81-100 GROUP TRUST

Wealth Manager

401(k) 401(k) 401(k) 401(k) Wealth Client Wealth Client Wealth Client

Wealth Client

Wealth Manager

Broker/Dealer RIA

81-100 GROUP TRUST FUND LINEUP

Large Cap Mid Cap Small Cap Fixed Income International Target Date Large Cap Mid Cap Small Cap Fixed Income International Target Date Large Cap Mid Cap Small Cap Fixed Income International Target Date

Types of Investments Available

81-100 GROU P TRU ST FU N D L IN E U P

C I T s Mutual Funds E T F s U M A s S M A s

Process for Adding Plans to a Group Trust

Plan fiduciary signs the participation agreement Record keeper coordinates the conversion of assets

8 1 - 1 0 0 G R O U P T R U S T F U N D L I N E U P

Mid Cap Mutual Fund Small Cap Mutual Fund Large Cap Mutual Fund International Cap Mutual Fund

81-100 GROU P TRU ST FU N D L IN E U P

Mid Cap CIT Small Cap CIT Large Cap CIT International Cap CIT

Lower Fees

Benefits of CITs & Group Trusts

Simple Process Differentiates Your Company Unlocks Economies

• f Scale

Thank You

Stephen Ponder

(303) 996-3784

sponder@trustalta.com

Questions?