Most investment options within the Intel Retirement plan have the following disclaimer right at the top of the fund summary sheet:
Information on this investment option was provided by your plan sponsor, plan trustee, investment manager, trustee or third party data provider. This investment is not a mutual fund.
So, if it isn’t a mutual fund, what is it?
These investment options are known as collective investment trusts, or CITs, and Intel uses them frequently in building its fund lineup. In fact, out of the 31 options available in the 401k account only 4 of these are actually mutual funds. And last weekend the Wall Street Journal ran an article (“Some Funds in Your 401(k) Aren’t Really Mutual Funds After All) highlighting the growing popularities of CITs.
At first glance CITs are like mutual funds; they are a pool of capital invested toward a specific mandate: for example to track the S&P 500 index. But there are differences too. CITs are created specifically for qualified retirement plans by banks and trust companies. They’re supervised by banking regulators instead of being required to maintain all the SEC rules placed on mutual funds.
Lower Cost Investment Options
Given the lower regulatory burden and since these CITs are created specifically for individual retirement plans, the plan itself can negotiate fees and avoid the marketing costs typically incurred by retail investors.
And this cost savings can add up, according to the Wall Street Journal “participants in 401(k) plans with $1 billion in assets pay an average of 1.01% in fees for an investment lineup of retail mutual funds…. But with collective trusts, average costs fall to 0.54%”
Given this cost savings and “a wave of litigation over high 401(k) fees” it’s no surprise these low-cost options are growing—totaling $2.4 trillion as of 2014. Roughly 60% of plans offered CITs in 2014 according to Callan’s 2015 Defined Contribution Trends.
There are a few drawbacks to investing in CITs however—the lower fees come with less transparency. CITs don’t have ticker symbols and can be difficult for people to track along with their other investments. You can’t look them up on Yahoo Finance or Morningstar for example. Additionally, while the disclosure requirements are less than those placed on mutual funds, CITs are regulated by the Office of the Comptroller of the Currency (OCC). Disclosures are provided through the retirement plan itself not the fund.
Overall CITs are a valuable part of Intel’s (and other companies) retirement plans. We have found the investment performance of these funds inline with their investment mandate and the cost savings worth taking advantage of.
For example, within the Intel 401k account you could build a portfolio of 5 funds (only 1 of which is a mutual fund) and get an allocation to U.S. Large, mid and small cap stocks; international developed-market stocks; emerging market stocks; and U.S. government and corporate bonds. The costs for this globally diversified allocation to over 22,000 stocks and bonds? A meager 0.05% annually!
Cost savings are often overlooked but saving 0.50% annually (roughly the Wall Street Journal’s estimated savings of moving from mutual funds to CITs in 401k plans) adds up big time over a career. Over a twenty-year period, the additional wealth created by reducing fund expenses by just a half of a percent annually compounds to a total benefit around half your initial investment. For example, with an initial $500k investment, a 0.5% annual savings results in a total compound benefit of $225k over twenty years assuming an 8% return.
Intel does a good job providing necessary information about each of the various investment options in the plan, providing a Morningstar fact sheet with performance, costs, holdings data and other important disclosure for each investment option.
And while the investments can’t be tracked on a site like Yahoo Finance, investment performance can be tracked though your NetBenefits site directly, or better yet through a holistic performance reporting system like we setup for our clients.
So next time you see the disclose, “It’s not a mutual fund” you’ll know what it is and think to yourself it sure isn’t, but it just might be better.
For more information on navigating the Intel Retirement plan investment options download our free eBook where you’ll find:
- How to classify each Intel investment option into the most appropriate asset class
- The lowest cost option in each category
- All the Intel investment options intelligently classified on one
- Detail on each step in the framework and how to assess for your self