Recent notable court cases involving companies such as Ameriprise Financial and Lockheed Martin have addressed an often overlooked retirement plan option, which thanks to a growing focus on fee reduction, is picking up traction with plan sponsors. Settlement agreements in both the Ameriprise and Lockeed Martin cases both stipulated plan sponsors consider using collective investment trusts in their plans going forward. CITs are often less expensive to create and maintain and may be more flexible than their mutual fund counterparts given that they are subject to a different regulatory framework. While this may be a benefit to their fee structure, it can also be challenging because CITs are not broadly understood and often suffer misconceptions when compared to mutual funds. Below are the most common misinterpretations and frequently asked questions by fiduciaries.
What are CITs? They are pools of securities, which are sponsored by a bank or trust company, and are designed exclusively for qualified employee benefit plans like 401(k)s and pension plans. They look and feel like mutual funds, but haven’t historically been as broadly available — especially for small and mid-sized 401(k) plans. As the retirement plan industry evolves, so does the structure of a plan’s investment menu, including CITs.
CITs are not new. They were first launched in 1927 and were a popular choice among defined benefit plans for decades. When 401(k) plans were developed in the 1980s, CITs were an option in many of the early plans; however, given the operational constraints of CITs and their lack of widely available information, mutual funds soon became the preferred vehicle in most 401(k) plans.
That said, CITs have undergone significant developments over the years, making them comparable to their mutual fund counterparts, while also offering distinct advantages.
Also see: “Top 10 large company 401(k) plans.”
Early CITs were traded manually and typically valued only once per calendar quarter. Furthermore, since early CITs were unique to each bank and portfolio manager, information was generally not publicly available.
Fast forward to their current form, CITs, like mutual funds, are typically traded and valued daily. Additionally, reporting has vastly improved over the years, allowing for further analysis when conducting manager due diligence. Specifically, data is generally reported on a regular basis to databases such as Morningstar, Inc. or eVestment Alliance and may be accessible through provider websites. While access to CIT data has greatly improved, it is important to note that the level of data available may vary depending on the provider.
A common misconception regarding CITs is that they are not regulated. While 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, if at a nationally chartered bank or trust company or, if at a state chartered institution, CITs are regulated by their respective state authorities. In addition, CITs may also be subject to oversight by the Federal Reserve Board, Federal Deposit Insurance Corporation, Internal Revenue Service and the Department of Labor.
As CITs are not regulated by the same federal securities laws as mutual funds, they do not have the additional compliance costs associated with SEC required disclosures and filings. Without these additional costs, CITs can potentially provide considerable savings that can be passed on to plan fiduciaries and participants.
The retirement industry has evolved over the years, and as such, so has investment menu construction. In addition to determining which types of investment strategies are to be used, plan fiduciaries are also tasked with determining which type of investment vehicle is most appropriate for their plan and the cost structure to be used.
With recent fee litigation and the DOL’s fiduciary rule creating additional awareness on fees and fiduciary responsibility, it is not surprising that CITs are again gaining attention. As previously mentioned, CITs can potentially provide considerable savings compared to their mutual fund counterparts. From a fiduciary perspective, unlike mutual fund managers, CIT trustees are considered fiduciaries ERISA and are held to ERISA fiduciary standards. That said, CIT trustees must act solely in the best interest of the plan participants and beneficiaries, potentially making them more alluring in light of today’s legal environment.
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