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Home My WebLink About03. Proprietary ICMA-RC Fund Restructuring of Vantagepoint Funds to CIT Only StructureCentral Contra Costa Sanitary District August 23, 2016 TO: FINANCE COMMITTEE VIA: ROGER S. BAILEY, GENERAL MANAGER ANN SASAKI, DEPUTY GENERAL MANAGERC FROM: THEA VASSALLO, FINANCE MANAGER ``j --K 3. SUBJECT: PROPRIETARY ICMA-RC FUND RESTRUCTURING OF VANTAGEPOINT FUNDS TO COLLECTIVE INVESTMENT TRUST (CIT) ONLY STRUCTURE This October, ICMA-RC is restructuring its proprietary investment options to a collective investment trust (CIT) only structure. According to ICMA-RC, the change will deliver a simplified investment structure, improved flexibility, and more cost-efficient investment options that lower participant costs. Unlike mutual funds, CITs are exempt from U.S. Securities and Exchange Commission (SEC) registration and are only available to institutions such as retirement plans. While they are unregistered with the SEC, they are not unregulated, as oversight is provided by the Office of the Comptroller of the Currency (OCC), an independent bureau of the Department of the Treasury. As a result of this shift, the assets of each VT Vantagepoint Fund, currently invested in an underlying proprietary Vantagepoint Fund, will be invested in an underlying proprietary CIT Fund. ICMA-RC estimates this change will reduce annual expenses of each VT Vantagepoint Fund by 0.04% to 0.06%. A Collective Investment Trust (CIT) is also known as a commingled or collective fund. The following is introductory information on CITs, provided by the investment research firm, Morningstar': • Increasingly used in defined benefit (pension) plans and defined contribution (401k) plans. • Tax-exempt, pooled investment vehicles maintained by a bank or trust company exclusively for qualified plans, including 401(k)s, as well as for certain types of government plans. • Subject to banking regulations, not subject to the Investment Company Act of 1940. Less regulated. Not registered with the SEC. • Customization of holdings. 1 https://admainnew.morningstar.com/webhelp/FAQs/CIT_FAQ.htm Central Contra Costa Sanitary District Proprietary ICMA-RC Fund Restructuring of Vantagepoint Funds to Collective Investment Trust (CIT) Only Structure Page 2 of 2 • Less expensive for investors, thanks to lower marketing, overhead and compliance -related costs. Lesser profile. • No trading issues. CITs only managed for those specific plans and are not available to the general public. Market timing and other trading abuses tend to not be an issue. • Pension Protection Act of 2006 gave tailwind to CITs and approved them as default investment options for defined contribution plans. • Collective Trusts are unregistered investment vehicles, like hedge funds. Mutual funds, by contrast, are registered investment vehicles. • What registration means is that an investment vehicle, like a mutual fund,'is registered with the SEC/FSA, etc. and is compelled by law to disclose monthly performance and portfolios. That is not the case with collective trusts. • While unregistered, collective trusts are not unregulated. In the U.S., collective trusts are supervised by the Office of the Comptroller of the Currency (OCC). Staff sought the opinion of Lauren Brant, Managing Director at PFM Asset Management LLC. She believed the move to CITs to be an overall good change for the District, given that they are bank trust vehicles supervised by the OCC, are very common investment vehicles in the Employee Retirement Income Security Act of 1974 (ERISA) marketplace, and are typically lower cost than SEC -regulated mutual funds. In 1997, the District's legal counsel for benefit plan matters, Trucker Huss, provided a written legal opinion that the District and the Board have principal fiduciary authority for selecting and monitoring the investment providers and are the administrators of the Deferred Compensation (DC) Plan. Shortly thereafter, the Board approved staff's recommendation to allow future changes to the investment options and other administrative matters to be approved by the DC Committee. The DC Committee is comprised of the Finance Manager as Chair of the DC Committee and one representative from each of the four District departments. This Committee met on June 28, 2016 and met with ICMA representatives on July 15, reviewed the fund restructuring and did not express any concerns. No action is needed by the District, but this memo is being provided for the Finance Committee's information. Attached is a memo from David Tanguay, Senior Vice President, Client Services of ICMA-RC, detailing the change. Staff and ICMA-RC Managing Vice President, Western Region, Michele Martin will be available at the Committee meeting. ICMA-RC representatives John Saeli (Vice President, Market Development and Government Affairs) and Chris Chase (Vice President, Securities Counsel) will be present via teleconference. Attachment TV: cg ictiARC BUILDING PUBLIC SECTOR RETIREMENT SECURITY May 2016 Re: Proprietary ICMA-RC Fund Restructuring — Vantagepoint Funds Closing Dear Plan Sponsor: ER_O 1 ICMA-RC is restructuring its proprietary investment options to a collective investment trust ("CIT") -only structure. To accomplish this, the registered Vantagepoint Funds will be liquidated and assets invested in those funds will be transferred to collective investment trust funds (" CITs"). Like registered mutual funds, CITs combine the assets of multiple investors into a single fund with a specific investment strategy. Our CITs will adhere to the same investment objectives and use the same investment strategies as The Vantagepoint Funds they replace. The change to a CIT -only structure will deliver a simplified investment structure, improved flexibility, and more cost-efficient investment options that lower participant costs. CITs are widely accepted and are increasingly replacing registered mutual funds in retirement plans. Unlike mutual funds, CITs are exempt from SEC registration and can only be made available to institutions such as retirement plans, and not the general public. While CITs have traditionally been available only to large retirement plans, technological advances and industry enhancements in fund design now often make CITs more advantageous and attractive for public sector retirement plans of all sizes. Many CITs trade the same way as mutual funds and often are ranked by Morningstar®. Every plan and participant investor in The Vantagepoint Funds will be affected in some way by this change. Please carefully read the information below regarding the impacts to your plans and actions that you and your participants may need to take. Participants in your Section 401 and/or 457 plan(s) already invest in CITs — the VantageTrust Funds ("VT Funds"). You and your participants do not need to take any action. Many of the VT Funds currently invest their assets in a corresponding registered Vantagepoint Fund. These VT Funds are referred to as the VT Vantagepoint Funds. This October we plan for the assets of each VT Vantagepoint Fund, which are currently invested in an underlying proprietary Vantagepoint Fund, to invest in an underlying proprietary CIT Fund. We estimate that this change will reduce annual expenses of each VT Vantagepoint Fund by 0.04% to 0.06% ($400 to $600 annually per $1 million invested). ICMA-RC is committed to our mission of helping public sector employees build retirement security by providing a wide variety of quality investment options. This restructuring will increase value to plan sponsors and participants through a simplified investment structure, additional flexibility, and more cost-efficient funds. If you have any questions relating to the changes, please use one of the Contact Us options within EZLink (www.icmarc.org/login) for your Plan Sponsor Services team. Thank you, t3 David Tanguay Senior Vice President, Client Services AC: 29040-0416-0000 ICMA RETIREMENT CORPORATION 1 777 NORTH CAPITOL STREET, NE 1 WASHINGTON, DC 20002-4240 TEL: 800-326-7272 1 FAX: 202-962-4601 1 www.icmarc.org