401K holdings [ML moved me from an index fund to a CIT]

[miltonmom]

[Topic title edited for clarity - moderator oldcomputerguy]

Hello - Merrill Lynch holds a 401K which is invested in a Vanguard 500 index. They sold this fund and bought a CIT - collective investment trust which is supposed to mimic the prior fund. ML did this without disclosing to company participants. The CIT did not pay a quarterly dividend (even though they claim to have reinvested the funds? - what? I have zero confidence in ML at this point - they can provide no prospectus, holdings info, nor performance info on this new CIT. Perhaps I just don't have confidence because I was unaware of CITs. One reference I read likened them to Hedge funds! Please help talk me off the cliff before I pull everything out of ML.

[Geologist]

Collective Investment Trusts are not hedge funds. You should start by reading our wiki: https://www.bogleheads.org/wiki/Collect ... ent_Trusts

They are lower cost (for most people) ways of investing only available inside retirement plans. Many are invested in indexes like the S&P 500. As the wiki states, they don't have a prospectus (instead there is a declaration of trust). I suppose if it is new, it won't have a track record.

They don't pay dividends (which are only required for mutual funds/ETF's for tax purposes); instead they just incorporate their income in the net asset value of the fund.

I would guess ML did inform participants that your investment would be shifted this way, but it could have been buried in other disclosures/paperwork (my 403b always informs me about changes of this sort).

[Geologist]

Your terminology is not quite right. Merrill Lynch doesn't "hold a 401k", but it might administer it and it might have had a Vanguard (S&P) 500 as an investment choice (it would be an odd 401k in which that was the only choice). You might have held the S&P 500 fund as your only investment in the 401k.

You talk about "pull[ing] everything out of ML". What kind of 401k is this? Are you a current employee and how old are you? (These matters govern whether you can distribute funds from the 401k.)

[Northern Flicker]

Hello - Merrill Lynch holds a 401K which is invested in a Vanguard 500 index. They sold this fund and bought a CIT - collective investment trust which is supposed to mimic the prior fund. ML did this without disclosing to company participants. The CIT did not pay a quarterly dividend (even though they claim to have reinvested the funds? - what? I have zero confidence in ML at this point - they can provide no prospectus, holdings info, nor performance info on this new CIT. Perhaps I just don't have confidence because I was unaware of CITs. One reference I read likened them to Hedge funds! Please help talk me off the cliff before I pull everything out of ML.

It appears that ML moved you to a superior S&P500 fund for a retirement plan.

Mutual funds bear some costs for functionality that only applies to a taxable account. These include generally having to distribute dividends and capital gains in the calendar year in which they were accrued, and generating 1099's for that activity. And the retirement plan does its own record-keeping for share ownership. Vanguard will just record one entry for the entire retirement plan holdings of the 500 fund. Why should the plan incur costs for mutual fund record-keeping, when they do their own?

CIT's (Commingled Investment Trusts) were developed as a way to hold a pooled investment product in a retirement plan like a 401k without having to bear the unnecessary extra expenses that only apply to mutual funds.

Check the expense ratio of the CIT-- I expect it is a little lower than the expense ratio of the 500 fund. As such, you probably should be thanking the plan sponsor and ML for implementing the CIT.

[miltonmom]

Thank you all very much for the informative responses. More data - recently retired, no other investment options inside plan that mimic a 500 index.
I always like the idea of living off the "earnings" of the previous year so this new CIT vehicle rather muddies the water from that perspective. Will keep researching options, but would welcome any more thoughts. Current asset allocation 35% equities, 60% Treasuries, 5% cash in MMF.

[White Coat Investor]

Thank you all very much for the informative responses. More data - recently retired, no other investment options inside plan that mimic a 500 index.
I always like the idea of living off the "earnings" of the previous year so this new CIT vehicle rather muddies the water from that perspective. Will keep researching options, but would welcome any more thoughts. Current asset allocation 35% equities, 60% Treasuries, 5% cash in MMF.

Most retirees eventually roll their 401(k)s into IRAs. Any reason you haven't done that yet? Maybe you're between 55 and 59 1/2?

[exodusNH]

Thank you all very much for the informative responses. More data - recently retired, no other investment options inside plan that mimic a 500 index.
I always like the idea of living off the "earnings" of the previous year so this new CIT vehicle rather muddies the water from that perspective. Will keep researching options, but would welcome any more thoughts. Current asset allocation 35% equities, 60% Treasuries, 5% cash in MMF.

Keep in mind that dividends aren't a unique source of return. When paid, the share price drops, leaving you with the same wealth.

The CIT retains the dividends, increasing the share price. You need only to sell the x% to get your earnings. There is no mathematical difference.

Mutual funds pay out dividends purely for tax purposes. In a retirement account, taxes are irrelevant.

Your former employer is the one that made the change. They absolutely sent out notifications, but it may have been through a mechanism that you no longer have access to. That's one of the dangers of leaving your funds with a former employer.

[Northern Flicker]

Thank you all very much for the informative responses. More data - recently retired, no other investment options inside plan that mimic a 500 index.
I always like the idea of living off the "earnings" of the previous year so this new CIT vehicle rather muddies the water from that perspective. Will keep researching options, but would welcome any more thoughts. Current asset allocation 35% equities, 60% Treasuries, 5% cash in MMF.

When you need to take a withdrawal, rebalance back to your allocation weight, and monitor the overall balance. It doesn't matter whether any withdrawal from the S&P500 fund comes from price appreciation or dividends. What matters is how your balance is changing over time with you withdrawing what you need to meet expenses, and the market doing what it does.

[miltonmom]

Thank you again for all the responses. Will move accounts to IRA (with more options) with a more measured approach and not emotion.

[Northern Flicker]

A few points to consider regarding a rollover to an IRA...

1. 401k's are better protected from creditors if you ever were sued for a large amount. For many people this is a minor consideration, but also I believe the protections travel with the assets in a rollover as long as they are not commingled with IRA deposits. That is one reason so-called rollover IRAs exists-- to keep the funds segregated from other IRA assets.

2. Check the expense ratios of the 401k assets. The CITs may be cheaper than similar mutual funds.

3. IRAs often are easier to use when managing RMDs.

4. With most of your retirement portfolio in a tax-qualified account, and given your percentage in stocks, you could consider a target retirement income fund like VTINX, and have a 1-fund solution where the fund manager takes care of rebalancing for you. (VTINX is globally diversified, and includes short TIPS).