What Is a Common Fund?
A common fund, also known as a collective investment fund (CIF) or collective investment trust (CIT), is a type of pooled investment vehicle managed by a bank or trust company. It commingles assets from multiple fiduciary accounts, such as pension plans, retirement plans, or other trust accounts, into a single portfolio with a defined investment strategy. This structure allows for economies of scale, professional investment management, and diversification benefits for the participating accounts, falling under the broader category of pooled investment vehicles.
History and Origin
The concept of commingling client assets for collective investment emerged in the 1920s, allowing banks to manage smaller trust funds more efficiently40, 41. The first collective investment fund was organized in 1927. However, early developments faced scrutiny, particularly after the stock market crash of 1929, leading to restrictions that largely confined common funds to bank trust clients and employee benefit plans.
A significant turning point came in 1936 when Congress amended the Internal Revenue Code (IRC) to grant tax-exempt status to certain common funds maintained by banks38, 39. This was followed by the Federal Reserve's promulgation of Regulation F in 1937, which formally authorized banks to establish common trust funds35, 36, 37. This regulation provided a framework for their operation, requiring, for instance, a written plan for the fund's administration and regular valuation of assets34. Over time, supervisory responsibility shifted from the Federal Reserve to the Office of the Comptroller of the Currency (OCC) for national banks, and state authorities for state-chartered institutions31, 32, 33. The framework established by the OCC's 12 CFR 9.18 continues to govern these funds, laying out criteria for the collective investment of trust funds by national banks.28, 29, 30
Key Takeaways
- A common fund pools assets from various trust or fiduciary accounts, managed by a bank or trust company.
- They are primarily used by institutional investors, particularly for defined contribution plans and defined benefit plans.
- Common funds are generally exempt from registration with the Securities and Exchange Commission (SEC), operating instead under the regulatory oversight of banking regulators like the OCC.
- Their structure often leads to lower fees compared to retail-oriented investment vehicles due to their institutional nature and lack of public marketing.
Interpreting the Common Fund
A common fund is typically interpreted as an efficient way for fiduciaries to manage multiple trust or retirement accounts. Its primary utility lies in allowing small individual accounts to gain access to broader diversification and professional investment management that would otherwise be cost-prohibitive. For plan sponsors, the selection and monitoring of a common fund involve evaluating its stated investment objectives, past performance, and importantly, its fee structure and the bank's fiduciary responsibilities. Unlike publicly traded investment products, detailed information about common funds, such as their holdings or historical performance, may not be as readily available to the general public.
Hypothetical Example
Consider "Horizon Corp.," a company offering a 401(k) retirement plan to its employees. Instead of offering employees direct access to individual stocks and bonds, or even retail mutual fund shares, Horizon Corp. might utilize a common fund managed by "Trust Bank."
Trust Bank establishes the "Trust Bank Diversified Equity Common Fund," which pools the assets from Horizon Corp.'s 401(k) plan, as well as those from other institutional clients' retirement plans. Employees of Horizon Corp. would then allocate their 401(k) contributions to this specific common fund option within their plan menu. Trust Bank, as the trustee and administrator, invests the commingled assets according to the fund's stated [investment strategy], such as investing in large-cap U.S. equities. The value of each participant's interest in the fund is determined by the fund's daily or periodic net asset value.
Practical Applications
Common funds are pervasive in the U.S. retirement landscape, particularly within employer-sponsored defined contribution plans like 401(k)s. Their primary practical applications include:
- Retirement Plan Investments: They have become increasingly popular as underlying investment options in 401(k) and other defined contribution plans, often replacing traditional mutual funds due to their cost advantages26, 27.
- Institutional Asset Management: Banks and trust companies use common funds to efficiently manage assets for a variety of institutional investors, including endowments, foundations, and corporate pension plans.
- Fiduciary Responsibilities: For banks acting as fiduciaries, common funds offer a structured way to meet their obligation to prudently invest client trust funds while achieving scale and risk management benefits.
- Estate and Trust Administration: They are also used for managing assets within individual estates and trusts where the bank serves as an executor or trustee, enabling professional investment for accounts of varying sizes. The Office of the Comptroller of the Currency (OCC) provides extensive guidance and regulations for these types of collective investment funds.25
Limitations and Criticisms
Despite their growth and benefits, common funds have certain limitations and face criticisms. One significant concern revolves around transparency and disclosure. Unlike mutual funds, common funds are not registered with the Securities and Exchange Commission (SEC) and are therefore not subject to the same public disclosure requirements23, 24. This can mean less publicly available information regarding their holdings, fees, and performance, which may make it harder for plan sponsors and participants to conduct thorough due diligence or compare options effectively.
Furthermore, while common funds are regulated by banking authorities like the OCC, their regulatory oversight framework differs from that of mutual funds21, 22. Critics argue that this fragmented oversight may lead to inconsistencies or gaps in consumer protection, especially given the rapid growth and increasing prominence of common funds in [retirement plans].20 The lower public transparency can also pose challenges in assessing potential conflicts of interest or ensuring optimal [investment management] practices.
Common Fund vs. Mutual Fund
While both common funds and mutual funds are pooled investment vehicles offering [diversification] and professional [investment management], key differences lie in their regulatory structure, target investors, and accessibility.
| Feature | Common Fund (Collective Investment Fund/Trust) | Mutual Fund |
|---|---|---|
| Primary Regulators | Office of the Comptroller of the Currency (OCC) or state banking authorities; Department of Labor (for ERISA plans)16, 17, 18, 19 | Securities and Exchange Commission (SEC)14, 15 |
| Target Investors | Primarily institutional clients, such as qualified [retirement plans] (e.g., 401(k)s), endowments, and trusts13 | General public (retail and institutional investors)12 |
| Registration | Generally exempt from SEC registration11 | Registered with the SEC under the Investment Company Act of 194010 |
| Transparency | Less public disclosure of holdings, fees, and performance8, 9 | High level of public disclosure via prospectus and reports7 |
| Fees | Often lower expense ratios due to institutional nature and direct negotiation5, 6 | Generally higher [expense ratio]s due to marketing and public distribution4 |
| Availability | Offered as investment options within specific institutional plans or trusts3 | Widely available for direct purchase by individual investors and institutions |
The confusion often arises because both types of funds pool capital and aim to generate returns through diversified portfolios. However, the regulatory environment and the specific clientele they serve result in distinct operational differences.
FAQs
What is the main purpose of a common fund?
The main purpose of a common fund is to pool assets from multiple [fiduciary accounts] or [trust funds] to achieve economies of scale, professional management, and [diversification] benefits for the participating entities. This allows smaller accounts to access institutional-level investment capabilities.
Are common funds regulated by the SEC?
Generally, no. Common funds are typically exempt from registration with the Securities and Exchange Commission (SEC) and are instead regulated by banking authorities such like the Office of the Comptroller of the Currency (OCC) or relevant state banking regulators. However, if they contain assets from plans subject to the Employee Retirement Income Security Act of 1974 (ERISA), they are also subject to ERISA's fiduciary standards.1, 2
Can individual investors buy into a common fund directly?
Typically, individual investors cannot directly purchase shares or units in a common fund. Access to common funds is usually through participation in a qualified [retirement plan], such as a 401(k) or pension plan, or through a trust or [fiduciary accounts] managed by the sponsoring bank or trust company.
Why are common funds often cheaper than mutual funds?
Common funds often have lower [expense ratio]s because they are not marketed to the general public, avoiding the associated sales and marketing costs. They are also often able to negotiate more favorable fee arrangements due to the large collective assets contributed by [institutional investors] from various plans.
What information is available about common funds?
Publicly available information on common funds is typically less extensive than for registered mutual funds. While detailed reports are provided to the participating plans and their sponsors, these funds do not have the same prospectus and periodic reporting requirements to the general public as SEC-registered [investment vehicles].