What is a CIF?
A collective investment fund (“CIF”) is a trust maintained by a bank or trust company that holds assets of ERISA plans for purposes of pooling their investments. A CIF is created by a declaration of trust but is otherwise similar to a mutual fund in that each plan investor has a proportionate interest in the underlying assets. Advisors can partner with the bank to create customized CIFs invested in accordance with the advisor’s advice. Note that these investments are not available to the general investing public.
Participation in the CIF trust is limited to tax-qualified retirement plans, including governmental plans, but nonqualified plans, VEBAs and foreign plans are excluded.
Application of ERISA to CIFs.
Every CIF in which an ERISA plan invests is subject to ERISA regulation unless the only plan investors are government plans or the CIF is registered as an investment company (i.e. as a mutual fund). This means that plan assets are deemed to include an undivided interest in every underlying asset of a CIF trust in which a plan holds an interest. In other words, the trust is a look-through investment vehicle.
The CIF trustee will be treated as an ERISA fiduciary and certain trust company personnel who perform fiduciary functions on behalf of the trustee may also be ERISA fiduciaries.
Likewise, an adviser that provides advice with respect to the investment of CIF assets will be treated as an ERISA fiduciary.
Section 408(b)(8) of ERISA provides a statutory exemption from the prohibited transaction rules for a plan’s purchase of a CIF interest from the bank that “maintains” the CIF, even though the bank is a party in interest to the plan, provided that the bank receives no more than reasonable compensation and the transaction is expressly permitted by the plan or by an independent plan fiduciary with authority to manage and control plan assets. This allows the bank to charge additional fees for asset management without the need for fee leveling as would be required of a mutual fund under PTE 77-4.
Maintenance by Bank – SEC
A CIF “maintained by a bank” is not considered an investment company for purposes of the Investment Company Act of 1940, and interests in such a CIF are exempt from securities registration under the Securities Act of 1933 and the Securities Exchange Act of 1934.
ERISA Fiduciary Protection for CIFs
Assuming a plan qualifies as a Section 404(c) plan, the fiduciary protection against personal liability for an individual participant’s losses would extend to all investment alternatives available under the plan, including any CIFs included in the plan’s menu. CIFs by their nature are investment products and, in this regard, they are similar to any other investment alternative offered to Plan participants. Thus, the fiduciary protection afforded to a Section 404(c) plan would clearly extend to CIFs as well as any other investment funds that are selected by participants from the Plan’s menu.
Required Investment Disclosures for CIFs
Given their investment product nature, any CIF included in a plan’s menu would be viewed as a designated investment alternative for purposes of the DOL’s new participant-level disclosure rules. Under these rules, participants must be give standardized performance information for each such investment alternative that must be presented in the format of a comparative chart. The chart would need to be included in both the initial and annual disclosures to participants and would be required to provide performance information for each investment’s benchmark index.
CIFs as QDIAs
ERISA Section 404(c)(5) offers fiduciary liability protection to Plan fiduciaries when participants are “defaulted” into an investment alternative under the Plan. This protection is intended to mirror the fiduciary relief provided to participants when affirmatively elect their investments under the Plan in accordance with ERISA Section 404(c). The QDIA Rules provide that the relevant liability protection will only be available if the default investment constitutes a QDIA. The applicable provisions generally contemplate two types of QDIAs:
An “investment fund product or model portfolio” that has either a target date retirement strategy or balanced investment strategy, or
An “investment management service” under which the assets of a participant’s account are allocated to achieve a mix of equity and fixed income exposures, offered through investment alternatives available under the Plan, in accordance with a target date retirement strategy only.
CIFs should fit under the first of these two approaches. CIFs may be utilized as a QDIA for a Plan, since the CIF adviser should have the required discretion over participant accounts as a result of the adviser’s discretionary authority over the CIF’s underlying assets.
Because CIFs constitute an “investment fund product or model portfolio” within the meaning of the QDIA Rules, advisers would have the flexibility to design them with either a target date retirement strategy or a balanced investment strategy.
Employee Communications
The DOL requires plan fiduciaries to furnish participants with general information about TDFs, as well as details relating to the particular TDFs that are actually offered by a plan. Participants need this information to determine if a TDF would be a good fit for them. Moreover, the participant-level disclosure regulations that went into effect in 2013 require the delivery of the participants of specific fee and expense information about TDFs, as well as their historical investment performance.
Consistent with the DOL’s proposed changes to the QDIA notice that must be furnished to participants, the DOL presumably expects that this will be supplemented by an explanation of how a TDF’s asset allocation changes over time, when it will reach its landing point (i.e. it’s most conservative asset allocation) and an illustration of the TDF’s glidepath.
By Marcia S Wagner, Esq.
The Wagner Law Group
http://www.wagnerlawgroup.com/