Collective Investment Trust funds have been offered as an investment vehicle for decades, but are recently gaining traction among retirement plan advisers. This new interest is occurring in 401(k) plans as litigation has shone a spotlight on transparency of investment fees and the value of service providers. An increasing number of class action lawsuits have alleged a breach of fiduciary duty for the failure to consider CITs as an alternative to mutual funds because CITs often have lower fees than their mutual fund counterpart.
Even though CITs are widely available and are used more often today than in the past, there is still confusion among advisers as to how they differ from mutual funds. Here is what advisers need to know about CITs for retirement plans.
Structured much like mutual funds, CITs are pools of securities that are managed exclusively for qualified retirement plans. CITs are only available to qualified pension, defined benefit, and defined contribution plans. Mutual funds, on the other hand, place no restrictions on who can invest. Therefore, individual retail investors can invest in a mutual fund while CITs are only for certain qualified retirement savings plans.
Mutual funds and CITs are regulated by different organizations and therefore follow a different set of rules and regulations. Since CITs hold only qualified retirement plan assets, they are regulated under many of the same laws that govern retirement plans. CIT managers are ERISA fiduciaries, which is the highest fiduciary standard under law. CITs are not regulated by the Securities Exchange Commission like mutual funds. They are regulated by the Office of the Comptroller of the Currency, which is part of the U.S. Treasury.
The difference in regulations ultimately has an impact on the price and fees. While CITs are heavily regulated, they do not have to comply with the SEC rules that govern retail investments and therefore have the potential to provide considerable savings that can be passed down to participants.
CIT fees tend to be lower than mutual funds, largely in part because CITs are designed for retirement plans, not retail investors. By spending less on compliance, distribution, and administration costs than what is required for retail investments, CITs can often offer lower fees than mutual funds.
CITs offer institutional pricing and some pricing flexibility is generally available. CITs may allow for customized arrangements based on plan size. With mutual funds, institutional and retail pricing is typically available, but there is no pricing flexibility.
Generally, CITs have lower overhead. They also have the ability to take advantage of certain internal cross trading practices which lowers trading costs, and they have lower distribution expenses. This contributes to the flexibility in pricing and the potential for lower fees in comparison to mutual funds.
Information is readily available for both CITs and mutual funds, but information sources for both differ. Information for CITs can be provided to participants by fund managers and service providers who can have access to CIT data through subscriptions to various databases and scoring tools, including Morningstar. Mutual fund information is available in the same manner, as well as publicly available through online sites, including Morningstar as well.
CITs provide necessary disclosures in regard to services being performed along with the associated compensation, and are often as transparent as mutual funds. Additional comparisons on mutual funds and CITs can be found in this investment vehicle comparison chart.
While mutual funds and CITs do appear to be similar in some ways, the differences in who can invest, the associated fees, and the regulatory bodies cannot be ignored. CITs are quickly becoming a popular and accepted alternative to mutual funds in retirement plans. It is important to understand the differences between both investment vehicles in order to act in your clients’ best interest when making recommendations.
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