Current Thinking

The Growing Use of Collective Investment Trusts in Retirement Plans

A blog by Frederic P. Slade, CFA

 

Collective Investment Trusts (CITs) have recently gained significant traction in the plan sponsor community. What are CITs? Unlike mutual funds, CITs, also known as commingled or collective funds, are pooled investment vehicles organized as trusts and maintained by a bank or trust company. CITs are available to qualified retirement plans whereas mutual funds are open to all plans. Most CITs tend to be invested in index funds, although actively managed offerings have been expanding.

There has been significant recent growth in both the assets and the utilization of CITs in pension plans in the United States. For DC plans alone, Pensions&Investments reports that CIT assets rose from $895.6 billion in 2008 to $1.5 trillion in 2014, while Callan Associates reported that 75.8% of plan executives offered at least one CIT in 2015 versus only 43.8% in 2011.

What are some potential advantages of CITs versus mutual funds? They include: lower administrative costs and regulatory costs; exemption from certain types of reporting such as prospectuses; and customized pricing flexibility depending upon plan size. Studies have estimated that CIT costs can be as much as 25 to 40 basis points less than mutual funds- although institutional mutual fund shares may be narrowing the gap. Similar to mutual funds, more and more CITs are offering daily pricing and liquidity.

Why do plan sponsors continue to actively seek lower costs? According to ERISA, plan fiduciaries are responsible for paying only reasonable expenses of administering a plan and investing its assets.  However, beyond this basic standard, the Department of Labor (DOL) expanded its fee disclosure requirements for ERISA plans in 2012. These annual disclosures include investment manager fees, trustee fees and participant costs. This added transparency, along with increased fee competition from providers, have made cost reduction a continuing and necessary goal for pension sponsors-be it switching to CITs, to institutional share classes or eliminating funds with revenue sharing.

 

NOTE: Information presented herein is for discussion and illustrative purposes only and is not a recommendation or an offer or solicitation to buy or sell any securities. Past performance is not a guarantee of future results.



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