Much has been written in the past few years about the amount of money participants in 401(k) plans lose to fees over the course of their working careers. 

And there has been no shortage of class-action litigation claiming mutual fund companies are charging excessive fees, or that plan sponsors are not abiding by their fiduciary requirements when they only offer mutual fund options laden with costly fees. 

International Paper settled a $30 million suit recently, and Fidelity is being sued by its own employees for only offering its own mutual fund options in their 401(k) plan. Cigna, Caterpillar, Kraft, General Dynamics and Wal-Mart are among other major sponsors that have settled or are in the process of litigating claims.

The message from the courts is clear: plan sponsors are going to have to re-examine their fiduciary obligations under ERISA to ensure that they are maintaining the best interests of their enrollees.

All of which goes a long way to explaining the emergence of CITs as a viable, cost-effective option for retirement plans. 

CITs are comingled accounts, structured much as mutual funds are, but are only available to qualified pension, defined benefit and defined contribution plans, meaning that individual retail investors are not allowed to buy in. 

One thing they are not is new. First established in the late 1920s, they've been around a lot longer than mutual funds. The Pension Protection Act of 2006 allowed CITs to be offered in defined contribution plans.  The result has been a 13-18 percent annual growth in the products since. About $1.6 trillion is currently invested in CITs.

Understanding their regulatory framework is key to understanding their cost-competitiveness against much of mutual fund industry. CITs are issued by banks, which means they are not regulated by the SEC, but rather the OCC, the Office of the Comptroller of Currency, a part of the Department of Treasury. State-chartered banks that issue CITs are subject to their specific state's regulations. 

The bottom-line is that CITs can offer significantly lower fees because less money is spent on compliance and marketing. For instance, they are not required to issue prospectuses for individuals enrolled in a program that offers CITs. Because they aren't offered to the public (they are not offered to the individual retail investor), marketing costs are not bundled into their costs and passed on to investors.

The costs of mutual funds varies greatly, depending on how actively they are managed and past performance benchmarking, and it is therefore difficult to do a straight cost-comparison between CITs and mutual funds.  Morningstar tracks CIT performance. Its data suggests the average CIT fee is about 26 basis points less than the average retail mutual fund. 

That difference to individual enrollees can be significant, particularly when projecting the cost of fees over a worker's lifetime. 

A typical managed stock mutual fund carries and average fee of 1.33 percent, according to Morningstar. A "large-blend" of U.S. stock mutual funds average .73 percent in annual fees, compared to .54 percent for the average CIT of similar composition. When considering funds investing in foreign equities, the savings are even greater. The difference can mean hundreds of thousands of dollars to an investor over their lifetime.

Not all CITs beat every mutual fund on costs, but the trends are hard to refute.

But if CITs are cheaper than the typical mutual fund because they endure less regulatory burden and costs, does that mean there are hidden risks investors assume when vying the cheaper CITs? 

That depends on who you ask. 

Paul Stevens, the president of the Investment Company Institute, a trade group representing the mutual fund industry, has previously claimed the proliferation CITs to be "regrettable" (the ICI did not respond to interview requests for this article). 

SEC authorities have publicly speculated about the potential need for their role in the regulation of CITs; while they are banking products, the actual investments are often managed by investment companies acting as a partner or sub advisor.

And let's face it: bank regulators weren't exactly at the top of their game when assessing the subprime mortgage risk leading up to the banking crisis.

Marla Kreindler, a partner with Morgan Lewis, spends a lot of her time counseling on the regulation of CITs.  That those regulations are different does not mean that they are lax, in her estimation. 

Not only are CITs subject to bank regulations, but they also answer to the Department of Labor and the IRS.  "True, CITs are not directly regulated by the SEC, but neither are mutual funds directly regulated by ERISA," says Kreindler. "In the legal community, ERISA is commonly regarded as holding the highest regulatory and fiduciary standards."

Kreindler's colleague at Morgan Lewis, Charles Horn, says he sees plans of all sizes incorporating CITs, not only the biggest sponsors. 

He says the reduced regulatory expenses of CITs does explain some of their cost-competitiveness, but that other factors are equally consequential to their pricing. 

"Some of the difference in fees can be explained by legal and regulatory costs that registered funds incur, but I think the cost comparison is also explained by a divergence in market and industry practice, in terms of what are considered to be customary fees in the mutual fund business, and what are more customary fee levels in the collective fund business (CITs), where the customer base is institutional rather than retail."

The Morgan Lewis attorneys agree that risk is born into any investment vehicle, but that CITs aren't inherently riskier than standard mutual funds. 

"The DOL has been on a clear path for the past couple of years. CITs are under increased scrutiny, but that's a result of the general regulatory climate, not because of the legitimacy of one investment vehicle or regulatory structure over another," explained Ms. Kreindler.

One AARP study suggests that 80 percent of 401(k) participants have no idea how much they are paying in fees. 

Educating sponsors, and supplying the proper data for their enrollees, is the challenge to marketing CITs value-proposition, says Nathan White, CFO of Midwestern Securities Trading Co, an East Peoria, Ill., based broker-dealer that specializes in implementing advisory programs in community banks. 

He says CITs came on his radar over a year ago, and that he's incorporating CITs where his firm once deployed index funds. 

"We don't deploy actively-managed CIT's, but rather more passive approaches that spread the risk across an asset class. As we sought out a relationship with a trust company, one of our biggest concerns was access to the performance of the CITs. We won't deploy a CIT that doesn't offer full transparency in the form of daily valuations."