CIT & Excessive fees

[mctoe]

Reviewing the fund lineup of a retirement plan.  One of the funds is a CIT with an expense ratio of 25 bps.  100% of the CIT is invested in a single Vanguard Fund with an expense ratio of 8 bps.  Why would someone create a CIT to only hold one mutual fund and then increase the fees of the fund?

[Bird]

To generate revenue

[mctoe]

Ok thank you Bird.  

[Larry Starr]

3 hours ago, Bird said:

To generate revenue

First of all, I don't know what CIT stands for; I'm guessing some sort of collective trust?  Or is it something else?

As to why, that's a question that should properly be asked of the person/entity that is selling it.  They may (or may not) have a good reason (or at least, what they think is a good reason) for doing it.  Once you have that insight, come back here and you can get an opinion (or 2 or 10!) about what we think about that answer. Who knows, maybe there is a REALLY GOOD reason (other than higher revenue).

[jpod]

Let's assume it is a 3(c)(11) collective investment trust, in which case all of its assets are automatically deemed to be "plan assets."  Hard to believe the facts are as simple as what cmtoe says they are, but if they are, it would seem to be a per se PT (because most, if not all, of the 25 bps fees are unreasonable compensation).  Not only the provider but also the plan fiduciary that selected this for the plan has exposure. 

[Bird]

I was being a bit snarky with my response but at the same time somewhat serious.  In my (small plan) world, 25 bps isn't necessarily a lot and in fact might be a very good and reasonable amount, if compared to the same scenario with the same fund (without the extra fees) but with a 50 bps servicing fee.  John Hancock (nee Manulife) used to collect their revenue this way, and while I never liked it because I thought it was deceptive, it might result in, well, "non-excessive" fees.  It's not that much different from having 3, 4 or 5 different R share classes where you can pick from generating revenue within the fund expense structure or strip it all out and charge a separate "wrap" fee (to use old but I think short and sweet terminology).  I'm not sure that it can be said that most or all of the 25 bps are "unreasonable" unless/until you look at what you are getting, although I don't mind confessing that there might be a definitional reason for that position that I'm not aware of.

Bottom line, there's not enough info to say whether it the arrangement is good, bad or indifferent (although I personally find it deceptive and suspect that is the ultimate reason).

[mctoe]

The more I look into this plan the more issues I find.  I have limited knowledge of creating/maintaining retirement plans but do understand the principles of low cost/fee investing.  The fund I mentioned in the original post is a Collective Investment Trust and as far as I can tell the excess fees are used for administrative expenses of the plan.  The plan fund line up also includes A class shares which of course does not make sense.  A more significant issue with this specific plan is the non-disclosure of certain "expenses" of the plan.  The administrative expenses of the plan are documented and disclosed to participants, but there is another bucket of money being paid to "consultants".  The funds used to pay the consultants are not disclosed.  This is my understanding how this plan works: plan assets are transferred to the investment fund manager, an agreed upon revenue sharing amount is transferred to the revenue account, the revenue account then reimburses the plan for administrative expenses, and finally other funds in the revenue account are used to pay the consultants.  The plan does not disclose the funds paid to the consultants.  Is this common practice or highly unusual?        

[Larry Starr]

Never have seen such an arrangement in 35 years.  What is your role and position with this client?  Who designed the plan and is administering it?  If you want better info, it would help if you completely described what is going on and what your responsibility/relationship is.

[Bird]

What is the size of the plan (assets)?  I don't think this is that unusual.  Let's forget about the re-branded fund and look at the A shares.  It's losing favor but there are still plans that use A shares (where the minimums have been "bought out" by the platform so there are no up-front fees).  Let's say total expenses are 85 bps.  25 bps probably goes to the investment advisor, directly or indirectly, and a few (10-15?) bps may go to the platform and/or the TPA.  The rest is management expenses.  As long as the participant disclosure contains the 85 bps, that end is satisfied.  They don't need to know who gets what.  (But the fiduciaries do - that is the 408(b)(2) disclosure).

Again, this may or may not be reasonable.  If it's a $250K plan, I'd say it's very reasonable (if there are no other fees tacked on).  If it's a $50M plan, then it's on the high end.

[ESOP Guy]

I think you have to know more before you can say there is a problem. 

What if it is a way for small plans to gain access to the cheapest class of funds within that fund family and the total fees are still lower than what a small plan can get on its own for example?  Almost all mutual funds have shares that have much lower fees if you can invest say $5M.  Any given small employer's plan can't do it but could this structure allow it to happen?  

I don't think you can say there is no value in the structure.  It very well could be a problem.  I have seen plenty of layers of fees that existed to enrich people but you not seeing the value doesn't prove there is not value in the structure of the fund.  

[Bird]

On 11/29/2019 at 5:45 PM, ESOP Guy said:

What if it is a way for small plans to gain access to the cheapest class of funds within that fund family and the total fees are still lower than what a small plan can get on its own for example?

exactly

[mctoe]

Thank you for the responses.  It is a $350M plan.   

[mctoe]

On 11/29/2019 at 12:30 PM, Bird said:

What is the size of the plan (assets)?  I don't think this is that unusual.  Let's forget about the re-branded fund and look at the A shares.  It's losing favor but there are still plans that use A shares (where the minimums have been "bought out" by the platform so there are no up-front fees).  Let's say total expenses are 85 bps.  25 bps probably goes to the investment advisor, directly or indirectly, and a few (10-15?) bps may go to the platform and/or the TPA.  The rest is management expenses.  As long as the participant disclosure contains the 85 bps, that end is satisfied.  They don't need to know who gets what.  (But the fiduciaries do - that is the 408(b)(2) disclosure).

Again, this may or may not be reasonable.  If it's a $250K plan, I'd say it's very reasonable (if there are no other fees tacked on).  If it's a $50M plan, then it's on the high end.

Why doesn't the participant get to know who gets what?  As a participant, I would want to know what the 85 bps is being used for.  In your example, if the investment advisor for the plan is getting 25 bps some may consider that unreasonable.    

[Larry Starr]

2 hours ago, mctoe said:

Why doesn't the participant get to know who gets what?  As a participant, I would want to know what the 85 bps is being used for.  In your example, if the investment advisor for the plan is getting 25 bps some may consider that unreasonable.    

Because the PARTICIPANT doesn't have the ability to change the investments in the menu, so he needs to know only the costs associated with each.  The fiduciaries need to know the breakdown because they have to decide if the total is reasonable; but they don't have to explain their decisions to the participants (unless they are being sued!).  The other answer to your question: "Because that's the law".

[Bird]

18 hours ago, mctoe said:

It is a $350M plan. 

Well, 25 bps and using A shares sounds high but we still don't know the whole story.  There could be credits that are reallocated to participants.  Also if there are no external/direct fees then maybe the whole package is reasonable.  You need to strip everything apart, looking at direct and indirect fees and who gets what, and put it back together again to look at the whole picture.