Grow Your Practice with Customized Collective Trusts for 401K Model Portfolio

STRONGER

together

Strategies for success

2015 Partner Conference

Bringing Value to Your Practice and Your

Clients 401(k) Plan by using

Collective Investment Trust FundsDavid Hand, CEO

Hand Benefits & Trust, a BPAS Company

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


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


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


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 .


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


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


Benefits of Collective Trust Funds

Low Cost

Fiduciary

Investment Options

Distribution Brand

Audit – Returns

Scale--NSCC Fund Serve, Charles Schwab, Fidelity


2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 20150.00

0.50

1.00

1.50

2.00

2.50

3.00

CIT

Tota

l AUM

(tril

lions

)

NSCCBrand

PPAQDIA

FeesTransparency

Fiduciary Regs

Success of Collective Trusts


Future of Collective Trusts

2016 2017 2018 2019 2020 20210.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

CIT

Tota

l AUM

(tril

lions

)

"BICE""Low Cost"

"Alt Assets"2nd GenTarget

403(b)Church Plan

403(b)?IRA?


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?


Areas of Opportunities for CTFs

• Model Portfolios • Custom Solutions • MEP and MPT


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


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

http://www.bpas.com/media/hbt/Models_Wagner_WhitePaper.pdf




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


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


Model Portfolios

• Target-Date and Target-Risk Funds— Popular default investments for DC plans

— Many are “prepackaged” funds

— One size fits all


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


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


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.


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


Case Study

Observations: Underlying cost of Investment Funds

RIA/RK Model 23bpsHB&T CTF Solution 11bpsNet Savings 12bps

Passive (US + Alts)

13bps 7bps 6bps


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


2015 Fiduciary Regulations

• Transparency • Unconflicted Advice• Best Interest Contract Exemption

— 408(b)8— Computer Model— Advice vs Education


Questions

David Hand, CEOHand Benefits & Trust, a BPAS Company

Thank you

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