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Collective Investment Trusts 

A collective investment trust (CIT), also known as a collective investment fund, is a group of pooled accounts held by a bank or trust company. CITs operate like other pooled investments in that multiple investors with similar objectives combine their assets into a single portfolio, and investors in CITs assume the same investment risk, with no guarantee from the bank, trust company or any regulatory authority such as the FDIC.

CITs continue to be an attractive vehicle for plan sponsors to add to their retirement plan offerings. In 2021, 78% of defined contribution (DC) plans featured a CIT, making CITs the second-most common type of investment vehicle offered by retirement plans, after mutual funds.

Advantages of CITs

1) Lower overall expenses:

  • CITs are not registered with the Securities and Exchange Commission (SEC), eliminating costly registration-, legal-, board- and compliance-related fees. 
  • Since CITs may accept investments from only certain retirement plans or other eligible investors to maintain their securities and tax law exemptions, CITs require lower marketing and distribution costs compared to other vehicles. 

2) Quicker to launch:

  • Contributing to the generally lower cost profile, CITs may be quicker and less expensive to launch. CITs are traded through the National Securities Clearing Corporation (NSCC) to mirror mutual-fund structure.

3) Enhanced risk management:

  • By pooling assets, sponsors of CITs may take advantage of economies of scale to offer enhanced risk management for the participating investors than such investors could achieve by investing these assets in separate portfolios. 
  • CIT trustees serve as Employee Retirement Income Security Act (ERISA) fiduciaries to the plan assets invested in CITs. ERISA fiduciary standards require the bank, as trustee, and any sub‐advisers it may employ to assist in the management of the CIT, to act solely in the best interests of plan participants and their beneficiaries as a whole, thereby avoiding potential conflicts of interest.
  • Plan sponsors appreciate that CIT trustees are subject to ERISA fiduciary standards with respect to ERISA plan assets invested in CITs. 

4) Diverse and innovative investment opportunities:

  • By pooling assets, sponsors of CITs may also take advantage of economies of scale to more diverse and innovative investment opportunities for the participating investors. CIT providers are developing more CIT products to compete with mutual funds, despite the CIT space was dominated by indexed and stable-value investment strategies historically.

5) Targeted marketing and distribution efforts:

  • CITs accept investments from certain retirement plans or other eligible investors only. As such, CITs’ marketing and distribution efforts are more targeted than other pooled investment vehicles. 

6) Flexible pricing:

  • Banking regulators allow CITs to offer variations in pricing to different investors, provided that the fees are reasonable and commensurate with the level of services provided. CIT fees are sometimes more negotiable than fees available in other regulated pooled investment vehicles. CIT trustees recognize that ERISA plan fiduciaries have a fiduciary duty to ensure that the fees charged for a plan investment option are reasonably related to the services provided.

7) No disclosure requirements

  • CITs are not registered with the SEC, eliminating extensive public disclosure requirements

8) Reduced investment minimums

  • CIT Providers are waiving or reducing investment minimums for sponsor participation. In the past, an investment minimum of $100 million or $150 million or $200 million in assets could be a barrier.

9) Management flexibility

  • CITs allow for greater management flexibility, such as customizing underlying investments, negotiating fees, adding or subtracting managers.

10) Compatibility

  • CITs are now more comparable to NSCC Fund/SERV®.

11) Improved reporting and transparency

  • CITs have improved reporting and transparency as a result of compliance with Department of Labor (DOL) disclosure requirements under the ERISA. Historically, the lack of detailed expense information posed a headwind to the broader use of CITs, while plan sponsors now benefit from greater transparency on pricing practices in the DC market as a result of several DOL regulations governing fee disclosures to plan sponsors and participants.
  • CITs enable easy access to information on recordkeeper websites, quarterly statements and fact sheets. Some CITs now have ticker symbols.

Key Buying Factors

1) Investment expense/cost of trust services:

  • Investment expense is generally the largest single expense associated with a retirement plan. Lower-cost CITs provide plan sponsors and participants with the potential for considerable savings as the industry becomes more focused on driving down plan costs to enhance performance.

2) Investment strategies available:

  • The range of investment strategies available in CITs rivals that of any other type of vehicle, at generally comparable (if not lower) costs.

As a best practice, plan sponsors and their advisors should generally choose the strategy first and then select the most appropriate investment vehicle. Other key factors to consider include providers’ onboarding process, brand recognition, distribution mechanisms and style, operations and technology usage and CIT governance. The plan sponsor is always the plan fiduciary, but CITs can help sponsors fulfill their fiduciary duty to offer reasonable, cost-efficient investment options since CITs typically cost less than their mutual-fund counterparts.

Trends of the CIT Market

The potential advantages that CITs offer when compared to other investment vehicles may continue to translate into greater demand. CITs also continue to grow for recordkeeper acceptance and consultant familiarity. Technological advances, regulatory reforms and other changes in the retirement plan investment landscape have also helped to increase the popularity of CITs. Long a popular choice of defined-benefit plans, in recent years, CITs increasingly have become a choice of DC plan sponsors. The CIT universe today covers a much broader array of investment strategies to meet client demands. 

Meanwhile, widespread sharing of CIT information with database vendors has been limited, both in terms of the number of CITs publishing data and the breadth of the published data, although data aggregators, such as Morningstar and NASDAQ, provide coverage of CITs and continue to expand and improve their institutional subscription databases in collaboration with CIT sponsors.


One comment on “Collective Investment Trusts 

  1. well done!

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