There is likely a mutual fund option on your default company 401(k) retirement plan menu that is not what it seems. This investment option is the least understood on an already confusing list of mutual fund retirement plan options.
Collective investment trusts have been added to several company 401(k) retirement plan main menu options in the last few years. Many of my individual company 401(k) retirement plan participant investment advice clients have called or e-mailed me with the “what do I do with this?” question.
The best definition of a collective trust is a pooled investment like normal mutual funds. But they are administered by banks and trust companies.
The good news is that these investment options most times have lower annual fees. The annual investment fees are so low that collective investment trusts are only made available in company 401(k) and government retirement plans.
But the bad news is that collective trusts don’t have ticker symbols. Individual company 401(k) participants can’t track their performance or compare them with other investments using financial news websites like Morningstar.com or Yahoo Finance. You can’t find the price of a collective trust in The Wall Street Journal.
Some collective trusts are “fund of funds.” The collective trust invests your money in the same mutual funds that are offered on the default company 401(k) retirement plan menu. The sales gimmick here is that the collective trust provides asset allocation for you in a one-shot investment option.
A Conservative collective trust would own 10-15% of the six or seven most conservative stock and bond mutual funds on the default company 401(k) retirement plan menu.
An Aggressive collective trust would own 15-25% of the four or five most aggressive stock mutual funds on the default company 401(k) retirement plan menu.
Lower annual costs for individual company 401(k) retirement plan investors is great. But lower costs should not come with more confusion and less transparency on the company 401(k) retirement plan menu.
I have never found the collective trust to be in the handful of best-performing company 401(k) retirement plan menu options. The same can be said of the close cousin of collective trusts; my old nemesis target date mutual funds.
There are low cost and great investment performance available in every default company 401(k) retirement plan menu. It usually takes an independent, third-party fiduciary investment advisor to find those options for individual company 401(k) retirement plan participants.
Ric Lager
Lager & Company, Inc.
