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Index mutual funds vs index collective investment trusts
Old 09-24-2015, 11:25 PM   #1
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Index mutual funds vs index collective investment trusts

My megacorp's 401k is switching from mutual funds to trusts later this month. Oddly, they're doing this for the Vanguard funds available, touting the reduction of expense ratios... like going from 0.02% to 0.01% for the institutional S&P500 fund/trust. I would be excited if they were making such a move for the portly INTL and other specialized funds, but this is just for the Vanguard offerings which don't really need an ER haircut.

Reviewing the new trusts' prospectuses, I see these trusts emit no dividends and instead retain the held company dividends. The loss of the dividends & their reinvestment (DRIP) is really bugging me. I've been reassured this nets out, and that the trust's share value will increase commensurate with the dividends that aren't being passed on, but this still seems like a loss of share acquisition (it is). It "feels" to me that growing a wider garden is better than taller produce. Anyone have experience with this or have reasons why I should just roll with the new trusts?
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Old 09-24-2015, 11:36 PM   #2
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If they are just reinvesting the dividends, I assume you will simply receive more shares. If so, I don't understand the taller crop analogy..... If they truly are increasing the shares' value, you will have a bit of trouble tracking the perofrmance as you won't be able to compare share price directly to the index it tracks without knowing when you purchased your shares and the accumulated dividend. I have trouble believing that would be the way the fund works....
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Old 09-25-2015, 06:46 AM   #3
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Here are some good links on these products:
From The Finance Buff:
From the Bogleheads wiki

I'm with the OP--a tiny .01% reduction in costs is not worth the issues/potential issues. The lack of transparency on holdings, the lack of SEC oversight (I trust them on these issues more than I trust the DOL, who oversees CITs), lack of a prospectus, etc, etc. The trust can modify their holdings/strategy whenever they want.
I suspect that the employer is getting something out of this.
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Old 09-25-2015, 09:34 AM   #4
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Thanks for the replies. Samclem, the Finance Buff link is very helpful & has a very straightforward assessment that highlights the lack of dividend reinvestment for me, the end user. What the trust, itself, does with the dividends that its not passing on, I'm not sure but the idea is supposed to be it results in the trust's share value increasing. Robertf57, agreed that this make tracking performance harder.
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Old 09-25-2015, 02:50 PM   #5
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Well, I learned something..... I don't want to be in collective investment trusts!
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Old 09-26-2015, 11:04 AM   #6
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Originally Posted by growerVon View Post
My megacorp's 401k is switching from mutual funds to trusts later this month. Oddly, they're doing this for the Vanguard funds available, touting the reduction of expense ratios... like going from 0.02% to 0.01% for the institutional S&P500 fund/trust. I would be excited if they were making such a move for the portly INTL and other specialized funds, but this is just for the Vanguard offerings which don't really need an ER haircut.
Did they distribute the literature of the new provider/UIT info? Keep in mind that they sometimes do these handwaving maneuvers to hide things - they'll hold the "lower ER" in their left hand and keep waving that around in front of you, while in their right hand they hold the "UIT Fees" back closer to their chests, keeping it still, hoping no one notices them and instead just sees the "Holy Cow rock bottom 0.01% ER fees" in the parent fund. Because they know about 99% of people will never read that massive Terms and Conditions document that outlines all of their fees.

Make sure they give you literature on ALL fees that apply to the UIT and you can add them up!
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Old 10-11-2015, 08:20 PM   #7
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Did they distribute the literature of the new provider/UIT info? Keep in mind that they sometimes do these handwaving maneuvers to hide things - they'll hold the "lower ER" in their left hand and keep waving that around in front of you, while in their right hand they hold the "UIT Fees" back closer to their chests, keeping it still, hoping no one notices them and instead just sees the "Holy Cow rock bottom 0.01% ER fees" in the parent fund. Because they know about 99% of people will never read that massive Terms and Conditions document that outlines all of their fees.

Make sure they give you literature on ALL fees that apply to the UIT and you can add them up!
Thanks, MooreBonds, I will watch for something like this. I have the full prospectuses and there are no additional fees, loads or others listed aside from the trusts' expense ratios.

Been doing more talking, reading and thinking about these CITs. The dividends that aren't directly making it out to my layer are, in fact, being reinvested in the trust's holdings. So in the S&P500 example, the trust dividend reinvests and my "end user" share count amount stays the same but each share is now worth more because the trust itself is worth more after the div reinvestment. I get that part, and given the reduced ERs I suppose this is OK... as long as one doesn't need/want the flexibility of handling the dividends how they want/ need. Presumably this applies to capital gains, as they may be trust-retained like the dividends.

So, perhaps these trusts are ok for the accumulation phase, but perhaps not flexible for drawdown if one wanted to not sell shares but instead use CGs and dividends for living expenses. I still have a bad taste about the idea that, after each quarterly dividend, the trust's share price will rise and thus every subsequent employee withholding investment I do gets me fewer and fewer shares as I'm paying for the past dividends.

For me, I can leave the 401k plan's options by using the Fidelity BrokerageLink feature, then roll my own using the Fido Spartan index mutual funds. I have to pay a fee to use Vanguard funds under the Brokerage Link feature (some to-do here for me, however, regarding whether its a one-time fee or recurring each periodic investment and whether Advantage class shares are available). I'm definitely vacating the high-ER Intl trusts (0.67) in favor of the Fido Spartan Total Intl Stock Mkt fund (0.17). Weighing doing the same for the US equity index trusts but the trust ERs are very low so it is less of a slam dunk.

The good that has come out of my 401k making this change:
  • I know more about Collective Investment Trusts
  • I've used this as impetus to learn about & enable the Brokerage Link feature on my 401k & will be able to save about 0.5 ER for my INTL holdings
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Old 10-12-2015, 05:31 AM   #8
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I think CIT's are the way to go with tax-advantaged accounts. The lower administration expenses save the owners of these shares some money. Th Ohio 529 plan does something similar with Vanguard offerings with increasing share prices, but no dividends.

One can track things in a straightforward manner because there are no extra calculations. One can figure out the return of a comparable index fund by using morningstar.com.

The idea of distributions such as capital gains and dividends as being benefiicial to retirees is bogus in my mind, but one cannot own CITs in IRAs anyways, so after retiring, one can transfer their 401(k) of CITs into an IRA. If one keeps the 401(k) and the CIT, one can customize their own distributions simply by selling shares periodically and withdrawing the money.

CITs are great if they are offered by a well-run index company like Blackrock, Northern Trust, Wells Fargo, or Vanguard. Indeed, some of these places have been running institutional index funds even before Vanguard was created.
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Old 10-12-2015, 01:02 PM   #9
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Thanks, MooreBonds, I will watch for something like this. I have the full prospectuses and there are no additional fees, loads or others listed aside from the trusts' expense ratios.

Been doing more talking, reading and thinking about these CITs. The dividends that aren't directly making it out to my layer are, in fact, being reinvested in the trust's holdings. So in the S&P500 example, the trust dividend reinvests and my "end user" share count amount stays the same but each share is now worth more because the trust itself is worth more after the div reinvestment. I get that part, and given the reduced ERs I suppose this is OK... as long as one doesn't need/want the flexibility of handling the dividends how they want/ need. Presumably this applies to capital gains, as they may be trust-retained like the dividends.

So, perhaps these trusts are ok for the accumulation phase, but perhaps not flexible for drawdown if one wanted to not sell shares but instead use CGs and dividends for living expenses. I still have a bad taste about the idea that, after each quarterly dividend, the trust's share price will rise and thus every subsequent employee withholding investment I do gets me fewer and fewer shares as I'm paying for the past dividends.

For me, I can leave the 401k plan's options by using the Fidelity BrokerageLink feature, then roll my own using the Fido Spartan index mutual funds. I have to pay a fee to use Vanguard funds under the Brokerage Link feature (some to-do here for me, however, regarding whether its a one-time fee or recurring each periodic investment and whether Advantage class shares are available). I'm definitely vacating the high-ER Intl trusts (0.67) in favor of the Fido Spartan Total Intl Stock Mkt fund (0.17). Weighing doing the same for the US equity index trusts but the trust ERs are very low so it is less of a slam dunk.

The good that has come out of my 401k making this change:
  • I know more about Collective Investment Trusts
  • I've used this as impetus to learn about & enable the Brokerage Link feature on my 401k & will be able to save about 0.5 ER for my INTL holdings

The trust price doesn't actually rise when dividends are distributed. It stays roughly the same, although with the usual daily variations. When normal retail funds or individual stocks/ETF's issue dividends their prices go down by the value of the dividend (or capital gain distribution). Some funds do it differently, accruing dividends on the side sort of like you're thinking of and not including them in the price, but I've only run into a few of them, mostly bond funds. Nobody is getting anything for free, before or after the dividends or distributions.

This is a case where you are sort of forced into total return investing. There is no explicit "income". You just have to sell shares to generate the income you need.
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