'Collective Funds' Gain Traction in 401(k)s

[question everything]

The Wall Street Journal

'Collective Funds' Gain Traction in 401(k)s
By ELEANOR LAISE
July 24, 2008; Page D1

Don't look now, but your favorite 401(k) mutual fund may be going the way of the VHS tape. In a drive to cut costs, 401(k) plans are replacing familiar mutual-fund investment options with more-obscure vehicles known as "collective investment funds." Just like mutual funds, collective funds pool investors' assets and invest in stocks, bonds and other securities. The chief difference: Collective funds are typically available only in retirement plans. Because they aren't sold directly to the general public, they generally aren't regulated by the Securities and Exchange Commission.

Collective funds tend to be substantially cheaper than mutual funds, largely because they don't have to comply with SEC regulations or market to retail customers. That's driving 401(k) plans to embrace these products, which are offered by big fund providers like Fidelity Investments, Vanguard Group and Charles Schwab Corp. as well as by banks and trust companies.

(snip)

Since fees eat into returns, lower-cost investment options can mean a bigger nest egg for 401(k) plan participants. But these funds can also have substantial drawbacks. They're not listed in the newspaper or on financial-news Web sites, and they often offer far less information on their performance and holdings than mutual funds. Collective funds aren't required to send out prospectuses, and some value their holdings and update performance only monthly or quarterly. Also, collective funds, which are also known as collective trusts, can't be rolled over to an individual retirement account when the participant leaves the 401(k), so participants have to transfer their funds into other investment options if they take these assets from the plan.

(snip)

Collective funds have been around for decades, but employers and money managers are embracing them now as 401(k) plan fees come under increasing scrutiny. Lawmakers have been introducing bills aimed at creating better 401(k) plan fee disclosure, and recent lawsuits filed by plan participants against employers have claimed that workers were charged excessive 401(k) fees. Late last year, the U.S. Department of Labor released new regulations making it easier for employers to automatically direct workers' 401(k) assets into certain types of collective funds if the workers don't select their own investments, and the department this week proposed new regulations to improve 401(k) fee disclosure to workers.

(snip)

Major employers are making the move to collective funds -- and often dropping mutual funds from their 401(k) lineup. DuPont Co. revamped its 401(k) plan's investment options in February, replacing a lineup that consisted primarily of mutual funds with one that includes only collective funds and other non-mutual-fund options. Chrysler LLC, which started using collective funds in its 401(k) plan about five years ago, when it was part of DaimlerChrysler AG, is adding four more of the products to its lineup this year.

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URL for this article:
http://online.wsj.com/article/SB121685751525579151.html (subscription)

[crazymans economics]

1. Oh, great, in a system that doesn't require reporting...

...they are promoting a new system that requires even LESS accontability and reporting.

Why do we trust a system that does virtually nothing to earn that trust?

[question everything]

2. I have to say - this is what we've had in our current 401K

At first, I was puzzled that the funds were not listed anywhere. However their website (the Principal) provides performance information and, until this year, of course, the funds performed quite well.

Interesting comment, though, about rolling over to IRA.

We had 401K with a former employer and they were Vanguard and T.Row Price. So once we decided to roll them over to an IRA, it was real easy.

[Common Sense Party]

4. Insurance companies have long used these "separate accounts."

Essentially, they're the same mutual funds as their retail counterparts, but the accounting is different. They use "units" rather than shares, and the separate accounts are not directly listed on Morningstar or other databases. Sometimes the fees are lower, but often they are higher. The performance, as you say, is shown by the 401(k) provider on statements and their website.

I haven't had too many complaints about mine. Performance, as you say, is usually good. Now, there are more bargains, so I can purchase more units.

[Common Sense Party]

3. I dunno. If only there were a BOOK out there that told me WHY I shouldn't trust the system!

Then my life would be complete!