For many retirement plan sponsors, the decision of which investment vehicle to select for their participants is one of their most important — and most arduous.
Collective investment trusts (CITs), also known as collective trust funds, are pooled investment funds designed exclusively for qualified retirement plans. CITs are being added to a growing number of retirement-savings programs.
In this blog, I seek to provide insight for plan sponsors on why CITs have become more popular in recent years. Below are the top three reasons for selecting a CIT for your retirement plan.
1. Customized fees and optional revenue-sharing
CITs may offer many opportunities to structure fees based on plan needs. The flexibility that CITs have in how they charge investment management fees permits tailoring of the investment fees paid by CIT participants, and may even result in cost savings. This gives plans the ability to customize plan participant recordkeeping arrangements and fees.
Many CITs also offer customized share classes that may allow for varying levels of revenue-sharing based on the plan’s needs. These custom share classes also allow for the negotiation of fees for larger plans and for larger relationships, including both platform and consultant relationships.
CITs can offer:
- Customizable fees that can be negotiated for larger plans with economies of scale.
- The potential for cost savings that are passed on to plan sponsors and participants.
- Share classes with zero revenue-sharing and other classes with multiple levels of revenue-sharing.
- Share classes where all fees and expenses are netted from the daily traded net asset value (NAV).
2. Efficiencies
The structure of CITs offers several potential efficiencies. For example, since retirement plans/participants are generally working toward a long-term goal — retirement — they tend to be less reactive to market noise and more likely to “be in it for the long haul” rather than trading in and out of their investments. Therefore, CITs may see more consistent flows, and may not have to raise cash as often (i.e. less frequent selling of securities) in order to meet redemptions.
The structure of CITs may also make them more nimble in terms of adding and adjusting products as demands shift. For example, CITs are regulated by either the Office of the Comptroller of the Currency or the state’s department of finance, rather than the Securities and Exchange Commission.
Since CITs are not required to be registered funds because they are only offered to qualified retirement plans, there are no registration statements required, meaning that CITs may be able to modify existing strategies and bring new strategies to the market in a quicker time span than it takes to develop a new mutual fund.
CITs may offer efficiencies because:
- Flows are relatively consistent due to the long-term objectives of the participants.
- They are not subject to a lengthy registration process required under the Investment Company Act of 1940.
3. Flexible investment strategies
The last reason qualified retirement plans should use CITs is their ease of use in a glide path or target date fund (TDF). TDFs are an area of growth, and CITs can act as an underlying portfolio in them, with the ability to customize management fees. In certain strategies, the majority of invested defined contribution plans may utilize the CIT as part of a TDF or fund of funds structure. CITs’ flexible investment strategies also enable the vehicles to act as an underlying portfolio in TDFs due to their ability to customize the management fees outside of the fund.
Considerations
As with any investment, there are several things to consider when examining CITs:
Transparency — Since CITs do not trade on an exchange, they’ve gained a reputation that they are less transparent than mutual funds since their daily prices aren’t publicly available. However, while some people believe that CITs don’t have the same level of reporting as mutual funds, most leading CIT providers do offer similar types of reports, including participant-approved fact sheets, daily prices and monthly performance data.
Regulation— Though compliance requirements for CITs are not registered like mutual funds, they are, however, subject to a different regulatory framework. For example, collective investment trusts must follow certain regulations from the US Department of Labor, the Internal Revenue Service, the Financial Industry Regulatory Authority (if the CIT is marketed by a broker-dealer) and the Commodities Futures Trading Commission (if the CIT invests in commodity interests such as futures or swaps).