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Collective Funds Fuel Growth in Stable Value

Collective investment trusts or pooled funds ("collective funds") combine assets from a variety of qualified plans into one professionally managed portfolio. These vehicles continue to spur growth of stable value in the defined contribution (DC) market, especially with small- and mid-size plans.

According to a 2007 Stable Value Investment Association (SVIA) survey of year end 2006 assets of $413 billion in total stable value balances in DC plans, $119 billion were allocated to bank collective funds. In a 2005 study, an independent investment research firm reported that of the $2.2 trillion in total 401(k) assets, collective funds accounted for $368 billion, or 16 percent of the total.

The percentage of plans using collective funds also grew from 32 percent in 2003 to 41 percent in 2006, according to Morningstar and Greenwich Associates. The market share of retail mutual funds fell from 65 percent to 54 percent during the same period. A myriad of data depicting the growth of collective trusts is highlighted in a recent white paper by AST Capital Trust, a leading trustee of collective trusts.

One key advantage of collective trusts is that they have lower operating costs than mutual funds because trusts deal only with institutions and not with retail clients. They not only have fewer accounts and less paper work, but there is no need to mail proxies and prospectuses as mutual funds are required to do, as collective trusts are not subject to the Investment Company Act of 1940. According to Hewitt Associates, the median expense ratio of some collective funds can be as much as 35 basis points lower than a similar styled mutual fund.

"Institutional funds, like collective trusts and separate accounts, are increasingly popular with mid- and large-sized employers as they are significantly less expensive than mutual funds," said Pamela Hess, Director of Retirement Research at Hewitt, commenting in the AST white paper. "A seemingly small number of basis points saved over time can lead to meaningful differences in participant savings."

"Low cost vehicles such as collective funds can help sponsors be better fiduciaries," added Greg Allen, President and Director of research at Callan Associates, in the same AST report. "The fact that collective funds can only be held in qualified plans significantly reduces the possibility of trading abuses in these vehicles.... The fact that hedge funds cannot buy and sell collective funds provides a natural level of protection that can allow for less restrictive trading rules than are necessary in a mutual fund vehicle."

Collective trusts and the stable value balances held within them are poised to grow even more thanks to the 2006 Pension Protection Act and the Department of Labor's proposed 401(k) plan automatic enrollment default investment options. While the proposal excluded stable value as a default option, it included target-date funds, some of which are collective funds. A growing number of the new, mixed-asset products using collective funds include a stable value component.

For two decades, stable value has been a major force in the collective fund universe and its opportunities for future growth are rising in tandem with the growth of collective funds. As more plans come to realize the advantages of collective funds versus mutual funds in target-date, lifecycle and balanced options, stable value has the opportunity to capture market share from mutual fund options.

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