What Every Plan Sponsor Should Know About Collective Investment Trusts

According to the Callan 2021 Defined Contributions Trends Survey, the use of collective investment trusts (CITs) within fund lineups has increased by 25% over the past decade, while the use of mutual funds has fallen by nearly 10%.

CITs have been around since 1927. It's not the new greatest thing. There has recently been a rediscovery of a concept that has been around for a long time. It's similar to how Amazon is the modern version of the Sears catalog. You can order anything you want. But this idea has been around for over a hundred years. Using the CIT structure is the same way. They've come back in popularity because of fee transparency and fee compression in the marketplace. Participants in a group retirement plan expect to be getting access to the lowest cost investments. So, a plan sponsor should be leveraging that group investment strategy of pooled assets when it is possible to deliver those favorable cost savings.

So What Are CITs?

CITs are pooled investment vehicles used for qualified retirement plans. They are provided through a bank or trust. A unique feature is that the bank or Trust Company sponsoring them acts as the trustee for those assets. They are a pool or group of investment assets that are being invested as a private investment portfolio mirroring a specific strategy often already being used by an investment manager. This mirrored strategy is generally already used in a mutual fund offered to eligible investors in a qualified retirement plan, 401(K), 457, or 401(a). The use of these CITs within your fund lineup has many benefits, including:

• Possible Cost Savings
• White Labeling
• Safety from Litigation

Understanding the Potential Cost Savings for Using CITs in Your Plan

Let’s say you have a large-cap growth manager offering a zero revenue mutual fund for 50 basis points. The lowest cost mutual fund they can provide you with is the 50 basis points. However, they may offer the same strategy in a CIT format, only to qualified retirement plans at a rate of 30 basis points. That amounts to quite a substantial discount.
CITs are leveraging the idea of providing the plan participants an advantage for pooling their retirement assets. It allows the participants to get the same investment strategy at a lower cost, which could often be lower than the lowest available share class in a mutual fund counterpart.

The Benefits of White Labeling

One aspect often overlooked is the idea of being able to white label. On occasion, participants select their investments based upon brand recognition or fund name, which should not necessarily be the deciding factors or criteria. If someone sees Fidelity or T.Rowe Price, they can easily recognize that name. But they may not recognize another more uncommon name. They often pick their investment with brand recognition over the other rather than based upon its strategy or asset class. With a white-labeled CIT, this would remove that brand bias from their selection process. Instead of saying T Rowe Price large-cap growth fund, it may say just large-cap growth fund. Therefore, someone will judge it more on the merits of strategy, performance, and cost.

CITs Help Address Cost Compression

There is constant litigation in our industry. Plan sponsors are facing scrutiny for not utilizing the lowest share cost of a mutual fund. Even more recent litigation has surrounded plan sponsors not using the lowest share cost, including CITs. It opens up additional fiduciary liability for plan sponsors not utilizing CITs as a lower-cost investment structure. A prudent practice for a plan sponsor would be to include CITs in their investment benchmarking and review. If they can be determined to be a benefit to participants they should be taken into strong consideration. This review and consideration is another best practice for those fulfilling their fiduciary obligations. If you are not currently reviewing CITs as part of your plan or part of your thought process, it could become a future liability.

Rules and Regulations Around Using CITs Within Your Plan

Many rules and regulations that will apply to it are not specific or exclusive to CITs. Ultimately you have the same level of fiduciary responsibility, scrutiny, oversight, monitoring, reporting and management. That same set of oversight rules apply to the CIT the same way they do to all the investments within your menu. Ultimately make sure that it is still going to be something that you are monitoring and reporting process is being handled in the same or similar manner to how you're handling any other investment.

Is Your Plan Eligible to Use CITs?

CITs are exclusive to qualified group retirement plans. These will not be available to you in a brokerage account or personal IRA. CITs are only available through employer-sponsored group plans, such as 401(a), 401(k), or 457. Their use is restricted to assets that the investment managers feel have a more stable and longer time horizon than a personal IRA or their personal trading account which might be traded frequently.

Our goal as advisors is to get employees to participate and ultimately ensure that every employee has the best ability and availability to save for retirement. So, one of the big things we've been dealing with in recent years is fee compression for all administrative fees and investment fees. The idea that we can work with these clients to provide them investments with the lowest costs possible is ultimately putting money back in those participants’ pockets. The goal is to help people save for retirement and everything we can do to increase their savings down the road. I believe that is the greatest advantage to the CIT for plan sponsors.

Want to learn more about other investment types? Check out his recent article: Profitability vs Social Responsibility: Understanding Socially Responsible Investments.

Investment advice offered through OneDigital Investment Advisors, an SEC-registered investment adviser and wholly owned subsidiary of OneDigital.