Important changes are coming to your Plan’s investment options

A transition account is required when an investment option being removed delivers securities rather than the cash amount of Plan assets invested in it. This process helps protect fund investors from incurring costs associated with large asset inflows and outflows while maintaining market exposure. While a fund is in a transition account, benefit payment distributions will not be interrupted.

The Plan’s investment structure was evaluated with a focus on reassessing the number and types of options as well as offering lower-cost investments, when available. Thus, the new funds have lower fees for participants and/or better market performance than the funds they are replacing.

The Board’s rules require that they periodically conduct a competitive bid process to make sure they are selecting investment options that offer the best value for Plan participants. Additionally, they consider long-term performance, investment team stability and whether the fund has a cohesive, repeatable strategy.

CITs were created in 1927, and their use has grown over the past few years in an effort to reduce unnecessary expenses in larger retirement plans. In 1955, the Federal Reserve authorized banks to combine funds from pensions, profit-sharing and stock bonus plans. The IRS determined that such funds could be exempt from tax. As a result, CITs became the popular choice for defined benefit plans. In 2000, the National Securities Clearing Corporation added CITs to its mutual fund trading platform, allowing CITs to trade daily and as fluidly as mutual funds. In 2006, the Pension Protection Act approved them as a default investment option for defined contribution plans.

The growth of CITs in large plans has accelerated over the past several years. For example, according to a 2023 Cerulli Report, 84% of plan sponsors offered CITs as part of their fund options.¹ Although the CIT product was designed for large plans, it is important to realize that the NYSDCP is a very large plan, requiring these financial firms to gain size to be an appropriate choice for the Plan. Each plan’s needs are unique, and the desire of participants to stick with familiar investment types may mean some of these cost-savings approaches experience minor delays before being adopted. In the case of the NYSDCP, the industry acceptance of CITs closely matched the decision points triggered by contract expirations.

CITs have gradually become the industry standard and the preferred investment vehicle for large institutional retirement plans such as the NYSDCP. While the dividends are not recorded the same way with CITs as they are with traditional mutual funds, the dividends and capital gains are received by the CIT just as they are with a mutual fund, and the share price of the CIT is reflective of the dividends and capital gains received. In other words, dividends paid by a mutual fund are simply a pass-through that depletes the assets of the fund, while a CIT reinvests these dividends within its portfolio. The Plan’s current treatment of mutual fund dividends is to reinvest them back into the paying fund inside participant accounts.

Current funds will be made available following the fund mapping by using the Schwab Personal Choice Retirement Account (PCRA). All of the mutual funds that are being eliminated will be available in the PCRA.

A custom fund is an investment option that is available only to the participants of the retirement plan in which it is offered.  It may be a mutual fund, CIT or other investment vehicle. A mutual fund is a collective vehicle through which multiple investors hold a diverse portfolio of securities, with each investor owning shares in the mutual fund itself. Mutual funds are regulated by the SEC. Like mutual funds, CITs are collective investment vehicles through which multiple investors invest collectively in securities. CITs are regulated by the Office of the Comptroller of the Currency. CITs may have lower expense fees and charges than a comparable mutual fund.

CITs are managed by a bank or a trust company and are regulated by the Office of the Comptroller of the Currency, a federal agency that regulates national banks or, for state-chartered trust companies, by the comparable state regulator.

The Board’s rules require that they conduct a competitive bid process to make sure they are selecting investment options that offer the best value for Plan participants. The changes may appear small but cumulatively may significantly reduce your overall expenses over the life of the account at the Plan level. This is one factor that goes into the decision-making process, but it is not the sole factor. Other factors taken into consideration include long-term performance, investment team stability and whether the fund has a cohesive, repeatable strategy.

No. The Board’s rules require that they conduct a competitive bid process to make sure they are selecting investment options that offer the best value for Plan participants.  The Board is not compensated by the investment providers. The Board is the fiduciary for the Plan.  These actions are taken only for the benefit of Plan participants.

Each contract was negotiated to have an eight-year term, but all investment products are continually monitored and evaluated by the Board Staff and the Plan’s Investment Consultant, Callan LLC, and can be terminated earlier if deemed prudent.

The Plan’s entire investment structure was evaluated with a focus on reassessing the number and types of options as well as offering lower-cost investments, when available. Each decision was based on several factors, including the stability and resources of the firms; performance relative to other investments in their class, risk, and expenses.

Fund managers find it very difficult to hold only securities that meet the narrow confines of the style boxes.  Small companies may become bigger and some mid-cap managers look to smaller companies for opportunities. Therefore, most actively managed funds labeled as one or the other are actually a combination of the two. There is also very little difference in the performance attributes between most small-cap and mid-cap funds.