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Retirement Savings

Target-Date Funds

Mutual Funds Versus Collective Trust Funds

David Dierking Jan 31, 2017

In this article, we attempt to highlight the prospects of CTFs in the target-fund space.

What Is a Collective Trust Fund?

The primary difference between collective trust funds and mutual funds is that CTFs are unregulated investments. They are not subject to the oversight by the SEC like the way mutual funds are. Also unlike mutual funds, CTFs are only offered through retirement plans and are not available to the average retail investor.

Larger plan sponsors tend to find greater benefit in offering CTFs in their retirement plans as larger balances tend to yield greater cost savings.

In case you are wondering whether mutual funds are right for you at all, you should read why mutual funds, in general, should be a part of your portfolio. You can also read how target-date funds work to familiarize with this specific class of mutual funds.

The Benefits of Collective Trust Funds Vis-A-Vis Mutual Funds

Lower administrative and distribution costs: Compared to mutual funds, CTFs are generally able to offer lower costs to investors through reduced administrative expenses and fewer regulatory requirements. On the contrary, mutual funds are required to register with the SEC and publish prospectuses, legal documents and regular fund composition information. CTFs have no such requirements and are able to save shareholders from these costs.

Traditional mutual funds are also required by the SEC to distribute dividends and capital gains to shareholders on at least an annual basis. Since they are not subject to SEC oversight, CTFs are not required to make such distributions. Therefore, CTF providers don’t have to incur the cost of making them.

Better tax-efficiency: With a traditional mutual fund, dividend and capital gains distributions are taxable if held outside of a retirement plan account. In a traditional non-IRA account, dividend and capital gains distributions are taxable. Even though dividends are not distributed by CTFs, shareholders still earn the income generated by the fund. It simply remains in the fund and is reflected in the share price instead of being distributed. Since CTFs are only available in retirement plans, balances grow tax-deferred, making them more tax-efficient than a traditional mutual fund.

More flexibility in choosing the right investment: CTFs generally have fewer restrictions as far as what they can invest in. Larger plans may also be able to compete for customized pricing structures in order to save more on plan fees. Invesco Growth and Income Trust and the Fidelity Growth Company Commingled Pool are a couple of CTFs that you can review.

Compliance with Department of Labor (DOL) fiduciary responsibility guidelines: In 2013, DOL introduced guidelines for selecting target-date funds within retirement plans. It emphasized the importance of offering investment options that limit fund expenses as much as possible. CTFs were developed in part to take advantage of lower administrative costs and improved efficiencies. In this way, CTFs are better positioned than traditional mutual funds.

Now that you know that CTFs can be better delivery mechanism for target-date funds, you can check the questions that you should ask your target-date fund provider. Also, you might be interested in checking out our Retirement Fund section to know the different types of pre-packaged target-date funds.

The Bottom Line

In the end, customized pricing for larger sponsors, flexible fund allocations, better alignment to Department of Labor fiduciary rulings and lower regulatory and marketing costs can make CTFs a better investment delivery vehicle, compared to mutual funds, for a target date fund.

Be sure to follow our Target-date Funds section to make the right investment decision.

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