Collective investment trust considerations for plan sponsors

Collective Investment Trusts (CITs) have gained traction amongst plan sponsors over the past decade-plus as viable investment alternatives to their mutual fund counterparts. Although CITs may seem like a recent phenomenon, the Coalition of Collective Investment Trusts notes that the first CIT was created in 1927. So, while they have been in existence just about as long as the more commonly used mutual funds, it was not until the 1980’s that CITs began to be utilized in defined contribution (DC) plans. Plan fiduciaries are then well-advised to examine in detail what collective funds are, how they may be constructed and regulated differently than mutual funds, and the advantages and disadvantages to utilizing CITs in retirement plan fund offerings.

What are CITs

Broadly defined, CITs are pooled investment vehicles organized as trusts and maintained by a bank or trust company. They are designed to take advantage of economies of scale by combining assets from eligible investors into a single trust. This comingling of assets allows for the CITs to offer lower overall expenses and greater risk mitigation than an individual investor might take on in the underlying securities alone.

Individual or retail investors cannot purchase collective funds. They are, by regulation, only available to qualified retirement plans, including 401(k) plans, defined contribution or defined benefit plans that are qualified under Internal Revenue Code Section 401(a), Taft-Hartley plans, and governmental 457(b) plans. Plan sponsors could view CITs as an asset-retention – or employee-retention – tool, given the low cost and inability to be held in an Individual Retirement Account (IRA).

Banks or trust companies that maintain the CITs are also known as the CIT trustees. These trustees serve as ERISA fiduciaries to the plan assets invested. ERISA fiduciary standards require the bank or trust company and any sub-advisors that assist in the management of the CIT to act in the best interests of plan participants and their beneficiaries.

CITs and mutual funds: Similarities and differences

At a high level, CITs and mutual funds have more characteristics in common than they do in contrast. Both are pooled vehicles that invest in some number of underlying securities. The pooled securities are valued daily and audited on an annual basis. Although the routes to gathering information on CITs and mutual funds may be different, both investment vehicles offer fact sheets which provide investors with an overview of the strategy itself and trailing performance data.

It is nonetheless important that plan sponsors recognize the differences between the two fund types. First, accessibility: as noted above, CITs are available only to qualified retirement plans, while mutual funds are available to all investors. As a result, CITs typically have the same or lower pricing than their mutual fund counterparts.

Next, availability: information on CITs is provided by the investment manager themselves, while information on mutual funds is made publicly available, with an associated ticker symbol for tracking on an exchange. This can prove challenging for those “do-it-yourself” participants who may be limited in the amount of information they can easily access on CITs, but the concern is mostly offset by plan recordkeepers furnishing the latest CIT fact sheets through the participant website.

Finally, regulation: CITs are regulated by the Office of the Comptroller of the Currency (OCC) while mutual funds are SEC registered and regulated. The standards set by the OCC and SEC are largely synonymous, but there are minor differences and form and execution of the standards enforced by the two. Unlike mutual funds, collective trusts are exempt from SEC oversight and are not subject to the Securities Act of 1933 or the Investment Company Act of 1940. If CITs are sponsored by a national bank or trust company – as is the case with most – they are subject to the OCC’s investment funds regulations. If CITs are sponsored by state institutions, they are regulated by their respective state authorities. As a practicality, this makes sense – banks are governed by the Comptroller of the Currency, so the banks’ investment products logically fall under OCC control.

CITs are also subject to ERISA to the extent there are plan assets invested in the CIT and therefore are subject to Department of Labor scrutiny. This is what requires the CIT trustee and any sub-advisor to comply with ERISA fiduciary standards when managing the fund.

Advantages and disadvantages

Plan sponsors who are considering the inclusion of a CIT in their investment menu must consider the advantages of the vehicle. They can provide stable investment management and trading efficiencies as they benefit from the more stable cash flow of an institutional investor base. They provide plan fiduciaries and participants with considerable potential savings as the industry becomes increasingly focused on driving down plan costs. Portfolio managers typically have more flexibility to apply the strategy per institutional guidelines and have the ability to customize the CIT.

While there are numerous advantageous to utilizing CITs, there are some disadvantages that must also be considered. CITs assume the same investment risk as other investments, with no guarantee from the bank or any regulatory authority, such as the FDIC. CITs do not have a ticker symbol or prospectus, thus limiting a participant’s ability to conduct independent research and performance evaluation. Fund information most commonly accessed instead via recordkeeper websites. Participants invested in CITs who may then leave their employment cannot allowably roll their collective trust assets over to an IRA – or, with rare exceptions, even to another qualified plan. They must liquidate and then roll over in cash before investing in holdings allowed in individual accounts.

Plan sponsors mulling the use of collective investment trusts shouldn’t shy away from the opportunity they may offer, but instead should take on the possibility armed with a working understanding of the trade-offs. CITs can be an effective means of offering plan participants savings and efficiency when used properly.

Brett Minnick is Senior Client Manager at Innovest Portfolio Solutions LLC. He is a member of the Retirement Plan Practice Group, a specialized team that identifies best practices and implements process improvements to maximize efficiencies for our retirement plan clients. His responsibilities also including assisting in Innovest’s retirement plan efforts including Request for Proposals for clients, evaluating and bench-marking plans and their service providers, as well as building performance reports and performing asset allocation studies. He is also a member of the Due Diligence Group, responsible for sourcing investment managers.