Commingled Trust Fund

What Is a Commingled Trust Fund?

A commingled trust fund combines assets under a joint investment management strategy. Commingled trust funds represent a pool of assets that are jointly-managed by the same entity. These funds can be from several sources, such as trusts and retirement plans.

Understanding a Commingled Trust Fund

Commingled trust funds, regulated by the U.S. Office of the Comptroller of the Currency (OCC)—a state banking authority—are usually offered by banks and trust companies. The Securities and Exchange Commission (SEC) does not regulate these funds. Investors may also refer to a commingled trust fund as a collective investment trust.

Key Takeaways

  • A commingled trust fund combines multiple trusts under one manager or management strategy.
  • A commingled trust is like a mutual fund except it lacks the same regulatory oversight and transparency as a mutual fund.
  • The Treasurer of the state of Illinois attempted to consolidate the state's trusts into a commingled trust in the late 2000s, but the attempt was blocked.

Professional money managers and pension consultants often pool the assets of various trusts and funds together to manage them jointly. This can be done when there are congruent investment objectives for each source of funds. Commingling the funds allows for greater efficiency and lower costs.

Commingled Trust Funds vs. Mutual Funds

Commingled trust funds are similar to mutual funds; they are both managed by professional money managers and invest in stocks, fixed income securities, and other assets. The main point of difference is that commingled trust funds are not available to all investors, whereas mutual funds are. This type of fund is only available to investors in specific employer-sponsored retirement plans.

Advantages of Commingled Trust Funds

Due to low overhead costs, commingled trust funds are cheaper to invest in similar alternative investment options, such as mutual funds. The ability to manage combined assets in a single fund creates cost efficiencies and reduces reporting and administration fees. Marketing expenses are minimized, as commingled trust funds are not publicly-traded and usually target a smaller group of investors. Because these funds are not regulated by the SEC, compliance costs are also kept low.

Before investing in a commingled trust fund, investors should seek professional advice to make sure that it is appropriate for their financial situation.

Limitations of Commingled Trust Funds

Because the SEC doesn't regulate commingled trust funds, investors may find it difficult to obtain detailed information about them. For example, it may be difficult to check if a fund has had any regulatory breaches. Most financial research companies offer limited coverage of commingled trust funds, which makes it challenging to track performance. Assets in these funds are accessed differently, which may prevent a traditional rollover if an employee leaves their employer.

Example of a Commingled Trust Fund

The Illinois pension system has been the target of political interests for decades. The money invested in the pension system has proved tempting for policymakers who would like to use the money to cover other, more immediate expenses. The governor of Illinois in 2003, Rod Blagojevich, said the state could not afford to continue funding state pensions and pushed the state to adopt "pension obligation bonds." Two years later, he helped pass a "pension holiday" whereby the state could pay less into the pension system for two years.

In 2009, the state Treasurer Alexi Giannoulias proposed consolidating the investment authority of the state's five retirement systems—The Teachers’ Retirement System (TRS), State Universities’ Retirement System (SURS), State Employees’ Retirement System (SERS), Judges Retirement System (JRS), and the General Assembly Retirement System (GARS)—into a commingled trust. The pushback on this proposal was on the grounds that commingled trust funds are less transparent than smaller, more focused funds. In addition, pooled funds are less diverse than discrete funds.

The Illinois Education Associate (IEA) argued in a white paper, "When Enron failed, the consolidated investment board of Florida had one firm that had an overweight position and lost the fund $335 million. Illinois losses were only about a tenth of this amount, in part because the three separate boards employed different money managers."

Similarly, SURS published a paper stating that its two primary concerns regarding creating a commingled trust were that "the current system of having the separate retirement system assets managed by separate boards of trustees makes it more difficult for any person with criminal intent to reach all of the state's pension assets," and "combining assets decreases [the] review of investment transactions."

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