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 n o i s s e r p m o C

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 1981 IRS Revenue & Ruling Group 81-100 Trusts

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”.

401(k) Plans Profit sharing Defined Benefit Available 457(b) to CITs and Cash Balance Money Purchase Plans 81-100 Group 403(b)(9) Trusts 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

CITs Continue Growth “Collective investment trusts are still climbing – Use of CITs in DC Plans Booming, both in use and in offerings.” Rises 68% Since 2008 - Benefits Pro, January 29, 2016 “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 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. The ‘Explosion’ of Collective Of the 100 largest corporate DC funds in 2016, CITs were used Trusts in 401ks by 54.3%, more than mutual funds, separate accounts and ETFs combined.” “Plan sponsors thought they had to be big to use - Pnesion & Investments, February 23, 2017 CITs; not true...” - 401k Specialists,, February 23, 2016

Principal Use Cases for CITs Scale Investment Strategies Efficiently Reduce investment costs Simplify Model Management

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

Reduce Investment Costs TER (bps)* 100 90 80 • CIT vs MF - 70 Callan 2018 60 Defined 50 Contribution CITs 40 Trends Survey Mutual Funds 30 *assuming $100 MM 20 10 0 US LargeCap International Target Date US Core Core Equity Funds Investment Grade

ERISA LITIGATION Number of retirement-fee-cases filed annually 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 0 5 10 15 20 25 30 35 401k and ERISA-covered 403b plans through September 2016. Source: Investment News analysis of Groom Law Group data

Notable Cases: Boeing • Anthem • Nordstrom • Lockheed Martin Corp • Tibble v. Edison (U.S. Supreme Court) • = Settlements over $300 million

Simplify Model Management Model in CITs Recordkeeper Models One Account Multiple Accounts No notifications to participants Notifications when new securities are traded for trading new securities Limitation on the types of securities Expanded available securities that can be held in the model Consistent Performance Varying Performance

What is an Record Investment Keeper Manager 81-100 Trust t s u r T Plan Plan Group Trust? 81-100 Trust Trust GROUP Plan Plan TRUST Trust Trust Plan Plan Custodian

MEPS vs 81-100 Group Trust M E P Plan M E P Specifications Plan Specifications 81-100 GROUP TRUST 81-100 GROUP TRUST Plan Assets Plan Assets

Does each plan still need its own trust? T t s r u u r s T Plan t Plan t T s r u u 81-100 r s T t Plan Plan GROUP TRUST T Trus t r u s t Plan Plan MEPS

Record Investment Keeper Manager Trust t s u r T Plan Advisor Plan Plan Advisor Plan 81-100 Trust Trust GROUP Plan Advisor Plan Plan Plan Advisor TRUST Trust Trust Plan Advisor Plan Plan Advisor Plan Custodian

Small plan solution 81-100 GROUP TRUST

Associations or 401(k) Member Groups 401(k) Member ASSOCIATION Association GROUP TRUST 401(k) Member 401(k) Member

Wealth Manager Wealth 401(k) Client Wealth 401(k) Client 81-100 Wealth GROUP Manager TRUST Wealth 401(k) Client Wealth 401(k) Client

Broker/Dealer RIA 81-100 GROUP TRUST FUND LINEUP Large Cap Large Cap Large Cap Mid Cap Mid Cap Mid Cap Small Cap Small Cap Small Cap Fixed Income Fixed Income Fixed Income International International International Target Date Target Date Target Date

Types of Investments Available 81-100 C I T s GROU P Mutual Funds TRU ST E T F s FU N D U M A s L IN E U P 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