My 401k plan recently added a new investment option. It’s a collective trust from BlackRock — BlackRock EAFE Equity Index Collective Trust. It invests in stocks in developed countries, tracking the MSCI EAFE index.
What Is a Collective Trust?
A collective trust is like a mutual fund but it only sells to institutional investors like 401k plans. Because a collective trust doesn’t take on retail investors, it’s exempt from some regulatory requirements. Not having to deal with retail investors also makes the costs lower.
Before collective trusts came along, some large 401k and 403b plans invested in separate accounts. In these separate accounts, a plan owns the underlying assets. If five plans want to pursue the same strategy, say matching the S&P 500, there are five separate accounts, one for each plan.
With a collective trust, these five plans put their assets together into one pool, just like how individual investors invest in a mutual fund.
Free from some of the regulatory requirements, a collective trust can focus on just the investing part. As a result the cost can be kept low. The expense ratio on the BlackRock EAFE Equity Index Collective Trust in my 401k plan is 0.10%. It’s not necessarily lower than the expense ratio of an institutional share class of the equivalent fund from Vanguard, but it’s still pretty low.
No Prospectus, No Ticker, No Holdings Report
Mutual funds are required to publish a prospectus and report their holdings and performance periodically to the SEC. Everyone can see them. There is a ticker symbol for every fund. You get the net asset value (NAV) every day from various websites. You get the latest information on the fund from Morningstar at least once a quarter, usually once a month.
A collective trust doesn’t have a ticker symbol or prospectus. The trust publishes a unit value but it’s only available if I log in to the 401k plan website. I can’t get the price updated automatically in Microsoft Money or Google Finance. I can’t find detailed information on the trust’s holdings. The information sheets linked from my 401k plan account still show information as of 12 months ago. I will have to somehow trust they are doing what they are supposed to do.
Is that a concern? It can be but I’m not too worried about BlackRock. BlackRock is the company behind iShares ETFs. They have a good track record with the ETF tracking the MSCI EAFE index. I think they will do just fine with the collective trust tracking the EAFE index.
A regular mutual fund pays dividends. It does because it’s required by law to pass through dividends from the underlying holdings to the shareholders so the IRS can tax the shareholders. Because a collective trust only sells to qualified retirement plans and those plans don’t pay taxes, a collective trust doesn’t have to distribute the dividends to the plans. The collective trust still gets the dividends from the underlying holdings. They just become a part of the trust’s NAV.
This does not affect the collective trust’s performance at all. Not having to track or pay dividends out actually lowers the collective trust’s cost.
If you also have a collective trust in your 401k or 403b plan, it’s a good alternative to higher-cost actively managed mutual funds. The lack of transparency is somewhat inconvenient, but it usually doesn’t affect the bottom line. You just have to give a little more trust to the collective trust.
Learn the Nuts and Bolts
I put everything I use to manage my money in a book. My Financial Toolbox guides you to a clear course of action.