To avoid potential litigation concerning a breach of fiduciary duty, some retirement plan sponsors want the lowest-cost structure available. That has helped boost the popularity of collective investment trusts in recent years.
“There’s definitely a steady amount of interest, a steady amount of growth,” says Robb Muse, senior vice president at SEI Trust Company. “The trend is going down market.”
Six in 10 defined contribution plans offered CITs in 2014, a 12% increase from 2012, according to Callan Investments Institute’s 2015 DC trends survey, which included responses from 144 plan sponsors mostly offering large and mega 401(k) plans.
Operationally, CITs look similar to mutual funds, however, collective trusts are only available to qualified retirement plans. The two are also subject to different regulatory requirements. Mutual funds are regulated by the Securities and Exchange Commission and subject to the Investment Company Act of 1940.
CITs are not subject to the 40 Act and are regulated by the Office of the Comptroller of Currency — which is part of the U.S. Department of the Treasury — says Russ Shipman, senior vice president and managing director of Janus Capital’s Retirement Strategy Group.
“What’s attractive about them is that from an operational perspective, they have so many of the advantages of mutual funds in terms of just being able to gain easy operational access to … pooled investment products from quality managers,” Muse says. “Because they’re differently regulated, they have ability to be differently priced. That’s the appeal, that you could get a comparable strategy at a cheaper price than you could in, for example, a mutual fund vehicle.”
Another advantage of CITs is the group of like-minded investors, Shipman says. Over time, that can mean less frictional cash is needed, he says. Mutual funds tend to hold more cash due to a disparate group of investors, Shipman adds. “Money is just flowing in and out daily.”
Disadvantages of CITs
While different regulatory and compliance standards enable CITs to operate at lower costs, they’re also a cause for concern. Some plan sponsors worry that OCC regulation isn’t as stringent as the 40 Act, Shipman says. Success among CITs over the last couple of decades has reduced some of that anxiety, he says.
A lack of information is another concern. “Prospectuses don’t exist for a CIT,” Shipman says. “Those have to be crafted.” Investors can’t track the performance of CITs like they can with mutual funds, he says, and it’s that “opaque nature” of collective investment trusts that makes educating participants more difficult.
“It takes energy and attention,” Shipman says. Larger plans that have the means to address this issue are more comfortable with CITs, he says.
Collective trusts should continue slow and steady growth in the near future, Shipman says. “They’re here to stay,” he says.
But as a complementary product.
The rumor circulating the past 10 to 15 years that CITs would replace mutual funds has no merit, Shipman says. “It’s just plain and simply not happened.”
Many plan sponsors are using CITs for their target-date funds, Muse adds. “We certainly expect to continue to see growth on the target-date side,” he says. “There’s a lot of attention right now on just making sure that plans have the right target dates, whether that’s created in a custom manner or utilizing the best off-the-shelf options.”
