Those who save for retirement have several options for investing their money with the ultimate goal of growing their balances over time. One such option is a commingled trust fund. Also known as a collective investment trust, a commingled trust fund is a pool of assets from several sources, such as trusts and retirement plans, managed jointly by the same entity. There are a number of benefits to be gained when you invest in this type of fund.

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How commingled trust funds work

In a commingled trust fund, assets from different accounts or sources are pooled together and managed under a common investment strategy. These funds are typically run by trust companies or banks and are generally overseen by the U.S. Office of the Comptroller of the Currency (OCC) or the state banking authority, depending on which type of institution is in charge of the fund. In recent years, commingled trust funds have become more popular among defined benefit plans (also known as pensions), as well as defined contribution plans, such as 401(k)s.

Benefits of commingled trust funds

One key advantage of commingled trust funds is that they're typically less expensive than other investment options -- namely, mutual funds. Combining different assets under a single fund allows those assets to be managed in a more efficient and cost-effective manner. Furthermore, commingled trust funds don't tend to come with hefty marketing expenses, because they target a narrower range of investors.

Commingled trust funds versus mutual funds

Mutual funds have long been a popular investment option for 401(k)s, and they work in a similar fashion to commingled trust funds. With both types of funds, the money that's invested is managed by professionals and invested in stocks, bonds, and other assets. Where they differ, however, is that commingled trust funds are not open to all investors as mutual funds are. Rather, commingled trust funds are limited to investors in certain 401(k)s and other qualified retirement plans.

Furthermore, whereas mutual funds are regulated by the Securities and Exchange Commission, commingled trust funds are not. As a result, commingled trust funds have less stringent reporting requirements, which can be both a good thing and a bad thing. On the bright side, this means that commingled trust funds spend less money on meeting regulatory requirements -- and those savings are passed on to investors. On the flip side, it can be more difficult to evaluate a fund's risks and past performance when it only has to disclose certain information to investors.

Another major difference between mutual funds and commingled trust funds is that mutual funds tend to come with much higher fees. Furthermore, because anyone can invest in mutual funds, their marketing costs tend to be higher.

If you're choosing between a mutual fund and a commingled trust fund for your retirement plan, then your best bet is to compare both funds' performance, as well as their costs. The fees you pay to invest your retirement dollars can greatly erode your overall return, so although you clearly want a high-performing fund, it's important to balance that performance against the costs of investing.

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