FAAF/EC – Collective Wisdom

Panelists at PLANSPONSOR’s 2009 Future of Asset Allocated Funds (FAAF) Conference – East discussed what these changes can mean for your plan.

Michael Goss, Executive Vice President at Fiduciary Investment Advisors, LLC, began by comparing exchange-traded funds (ETFs) to mutual funds. Both can cover several asset classes and be actively or passively managed, he said, though active management is more common now among ETFs. Those funds can be actively traded throughout the day and are typically low cost.

Every day, he explained, it is possible to see the underlying securities of the fund. These funds can be beneficial because they do have the ability to be traded intraday, but many have tracking errors relative to a benchmark, and some funds can be off by as much as two or three percent, he said. However, the biggest issue, Goss claimed, concerns their status as relatively “new” to the retirement plan industry, and the fact that there is not yet any clear way to access them across all recordkeeping platforms.

Andrew Harbouor, Senior Vice President of Wealth Management at Smith Barney, noted that not all exchange traded funds are created equal. Most, he claimed, are market-cap weighted, and stocks that are going up in price therefore have a higher “relative value” than those that are going down. He urged the audience to be aware of the different types of ETFs that are available.

Collective Funds

David Hand, CEO of Hand Benefits and Trust Company, reminded plan sponsors that collective investment funds, which might also be called collective investment trusts, were among the first retirement vehicles ever used. All through the 1960s and 1970s they were used primarily for large or multi-employer plans that had to be valued on a monthly or quarterly basis in order to get an evaluation done in the plan.

As technology developed, the funds were daily valued, and traded virtually like mutual funds. While they do have a speed to market benefit, he explained, they can only be used for 401(k) and retirement plan money. Otherwise, he explained, there are no restrictions on what the manager holds or expects to do with the portfolio, and there should be more access to fund information with collective investment funds than with any other type of investment. Harbour agreed, stating that because there is only 401(k) and retirement money in the investments, managers typically have greater flexibility to invest the money for a longer period of time without concern for massive fluctuations of cash flow in and out of the fund that are common in traditional retail mutual funds.

Harbour described one of the challenges that can occur when talking to ETF providers. Without revenue-sharing for recordkeepers, other options will have to be considered to help offset fees. One of the greatest benefits of using an ETF can be lost if used within a collective trust or some other kind of packaged arrangement, effectively blending the two solutions, complicating the recordkeeping process, and preventing intraday trading.

How Do People Get Paid?

Harbour posed this question: if there is full fee transparency, no 12(b)1 and intraday trading is lost, how do people get paid? Wrapping an ETF in a collective trust fund can add another layer of fees.   Even though ETFs are relatively inexpensive, plan sponsors should be aware of how different fees can add up when the fund is part of a lineup or on a platform. Plan administrators that offer ETF solutions often harp on omnibus trading, Harbour claimed, and get around that argument by trying to commingle everything together at the end of the day for one specific bloc trade. When educating participants about collective trust funds, he advised explaining how they differ from traditional open-ended funds, how the fee structures and managers might be different, and recommended face-to-face discussions.

Hand reminded the audience that while both have some features in common with mutual funds, ETFs and collective investment funds are entirely different.   Collective funds should be transparent to participants as long as they are provided with the right fact sheets, but exchange-traded funds have a lot more complexity.

- Sara Kelly

Collective Wisdom-How Mutual Fund Alternatives Can Make a Big Difference

There's something "new" going on behind the scenes at a growing number of asset allocation alternatives. What does the emerging importance of relatively new (exchange-traded funds) and relatively old (collective funds) mean for you?

Moderator:Alison Cooke , Managing Editor, PLANADVISER

Panelists:

Michael Goss , Executive Vice President , Fiduciary Investment Advisors, LLC
Andrew Harbour , Senior Vice President- Wealth Management, Smith Barney

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