Early collective investment trusts (CITs) were pools of securities, traded manually, and typically valued only once a quarter. While popular in defined benefit plans, CITs were not as widely accepted in defined contribution plans due to operational constraints and a lack of information available to plan participants.
Today, there is growing concern over how 401(k) plans are structured and the costs involved. Due to operational improvements, competitive fees, and accessible information, we are seeing a resurgence in the popularity of CITs.
Here we look at some of the myths these investment products still carry and shed some light on their benefits and how they should be used.
What is a Collective Investment Trust Fund (CIT)?
A CIT is a commingled (i.e., pooled) investment vehicle designed exclusively for use in qualified employee benefit plans that is administered by a bank or trust company and is regulated in the same manner as the administering bank or trust company. CITs are not guaranteed by the bank or FDIC and are subject to the same risks as any investment. CITs are also subject to oversight from the Internal Revenue Service (IRS) (Revenue Rating 81-100) and Department of Labor, and are held to ERISA fiduciary standards with respect to plan assets. As bank-maintained funds, CITs are exempt from registration with the Securities and Exchange Commission (SEC) under the Investment Company Act of 1940.
Myth vs. Reality
|CITs are a relatively new investment option that is not widely available.||CITs have long been popular in defined benefit plans, and are increasingly a choice in defined contribution plans.|
|CITs lack the reporting and transparency necessary to fulfill ongoing due diligence requirements.||CIT managers have worked diligently with Morningstar and other databases to report fund level data on a regular basis.|
|CITs are not regulated and are risky investments.||CITs have bank regulatory requirements, as well as additional oversight from the IRS and Department of Labor.|
|CITs provide fees comparable to mutual funds without any added value.||CIT fees tend to be more cost effective and may offer flexible pricing.|
The Advantages of CITs
Designed to streamline management and mitigate risk:
- Similar structure as mutual funds and other pooled vehicles – assets of investors with similar objectives are commingled in a single portfolio
- Portfolio is professionally invested by a third party based on the select objective
- Broad array of strategies available to meet demand
- Only for retirement plan investors so all share a long-term investment perspective
Trustees may provide additional fiduciary protection within the meaning of sections 3(21) and/or 3(38) of ERISA:
- CIT trustees and sub-advisors serve as ERISA fiduciaries with respect to the assets invested in CITs
- Must comply with ERISA fiduciary standards to avoid conflict of interest
- Act solely in best interest of plan participants and beneficiaries
Cost advantages and greater pricing flexibility relative to mutual funds:
- Can be quicker and less expensive to create as costly registration fees and public disclosure requirements are eliminated
- Often have lower administrative, marketing, and distribution costs than mutual funds
- Savings offered by CITs can be passed on to plan sponsors and participants
- Fees may be negotiable, especially for large institutions
Risks Associated with CITs:
- Plan participant assets cannot be rolled into the same investment vehicle if the participant changes employers
- CITs typically have shorter performance track records and the performance track record may be difficult to verify due to lack of SEC regulation.
For more information on CITs, please contact MFA Asset Management.
This article was originally published by Manning & Napier. Slight modifications were made for compatibility purposes.