Collective Investment Trusts: Lower Costs and Greater Flexibility
Though plan sponsors are increasingly including collective investment trusts (CITs) in their defined contribution plans, mutual funds are still the favored investment vehicle, possibly given participant familiarity, the perception of “portability,” and the ability to access publicly available information. However, CITs offer a number of advantages over a mutual fund. Here we’ll provide an overview of:
CIT and mutual fund characteristics
CIT regulatory considerations
CIT advantages specific to DC planning
Plan sponsors continue to look across investing best practices, including defined benefits strategies, to enhance defined contribution (DC) plans. Through this exercise, CITs are gaining in consideration and use, as they offer the potential for lower costs and more options for accessing institutional-quality investment strategies while maintaining ERISA fiduciary standards. Although traditionally offered by large plan sponsors, CITs are now being considered by smaller plans and are expected to continue capturing a growing share of DC plan assets across a spectrum of savings plans.
CITs and mutual funds typically serve a similar function within a defined contribution plan, providing participants with high quality, professionally managed investments that, in most cases, offer daily valuation and liquidity. Both may offer a variety of pricing structures to suit different market segments.
Yet there are some key differences between mutual funds and CITs, including how they are regulated, their cost structures and the degree of flexibility that each may offer plan sponsors.
What is a CIT?
Many CITs, like mutual funds, are pooled investment vehicles managed collectively under a common investment strategy. Like mutual funds, CITs offer daily valuation and liquidity and a variety of pricing structures to suit different market segments, but unlike mutual funds, CITs aren’t available in the retail market. Instead, many CITs are maintained by a bank or trust company and only offered to certain qualified retirement plans. In addition, CITs have a separate set of regulators from mutual funds and typically are restricted from making fund information available to the general public (though participants invested in CITs can access fund information from their plan sponsor or recordkeeper).
Mutual funds are regulated by the Securities and Exchange Commission (SEC) and are typically available to both retail and institutional investors. CITs, on the other hand, are generally only available to certain qualified retirement plans and do not have publicly available fund information and tickers. CIT providers are often regulated by the US Office of the Comptroller of Currency (OCC), as well as the IRS and Department of Labor, and typically available only to tax exempt entities. CITs may be governed by a declaration of trust and investment/operating guidelines. Many CIT managers are also held to ERISA fiduciary standards, meaning they must manage plan accounts solely in the interest of the plan’s participants and beneficiaries.
Lower Costs and Increased Flexibility
Amid increased public attention to DC plan expenses, many sponsors are looking for lower cost solutions. CITs typically have lower expenses than mutual funds due to lower overhead.
CITs may also offer more flexibility in pricing, allowing for customized arrangements based on overall plan size. As plan-level assets within a CIT increase, for example, fees could potentially decrease.
Finally, CITs also benefit from certain tax advantages which translate into material cost savings, especially with international investments. Based on our findings, an investor is eligible to reclaim an additional 17 basis points in dividend withholding tax in a CIT versus a mutual fund benchmarked against the MSCI ACWI ex US IMI Index.1 Lower fund costs can translate into increased retirement savings to participants.
An Institutional Approach to Investing
As referenced earlier, many CITs designed for retirement plans are managed exclusively to meet the needs of tax-exempt investors, making them an attractive choice for many plan sponsors. With an institutional focus, CITs can offer DC plan participants the type of high-quality, low-cost investment strategies enjoyed by pension funds and other institutional investors. Furthermore, CITs can provide sponsors access to alternative investment strategies that may not be available in a mutual fund. As institutional investment vehicles, many CITs allow plan sponsors more flexibility in designing and naming their investment menu. Customizing the name of investment strategies can help participants better understand the products in which they are investing.
Growth on Recordkeeping Platforms
A growing number of recordkeepers are now able to support robust reporting services for CITs, and plans of all sizes can now access certain CITs through most recordkeeping platforms. For sponsors considering CITs, we suggest having an in-depth conversation with your recordkeeper about their capabilities, available investment options and any changes to current service that may be associated with the addition of CITs. A recordkeeper’s experience and expertise can be a valuable resource when introducing CITs to a plan.
Exploring Your Options
The choice of whether to use CITs, mutual funds or both in your plan will likely depend on the type of plan you offer and your objectives as a plan sponsor. We believe the current CIT market provides a diverse selection of asset classes and differentiated share classes well-suited to the needs of DC plan.
The following questions are meant to help spark investment committee and consultant conversations as sponsors explore various vehicles for their DC plan:
How can you best serve the investment needs of your participants?
What impact would lower fees have on your participant’s long-term investment success?
What types of investment vehicles can your current recordkeeper support?
1 MSCI Index Data, published ERISA and RIC Tax Rates, as of December 31, 2020.
The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor. All material has been obtained from sources believed to be reliable. There is no representation or warranty as to the accuracy of the information and State Street shall have no liability for decisions based on such information.
All information is from SSGA unless otherwise noted and has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
Investing involves risk including the risk of loss of principal. The views expressed in this material are the views of SSGA Defined Contribution through the period ending December 31, 2018 and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Equity securities may fluctuate in value in response to the activities of individual companies and general market and economic conditions.
The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA’s express written consent. SSGA is the investment management business of State Street Corporation (NYSE: STT), one of the world’s leading providers of financial services to institutional investors.
Information represented in this piece does not constitute legal, tax, or investment advice. Investors should consult their legal, tax, and financial advisors before making any financial decisions.
Investing in foreign domiciled securities may involve risk of capital loss from unfavorable fluctuation in currency values, withholding taxes, from differences in generally accepted accounting principles or from economic or political instability in other nations.
The trademarks and service marks referenced herein are the property of their respective owners. Third party data providers make no warranties or representations of any kind relating to the accuracy, completeness or timeliness of the data and have no liability for damages of any kind relating to the use of such data.
This information is for informational purposes only, not to be construed as investment advice or a recommendation or offer to buy or sell any security. Investors should always obtain and read an up-to-date investment services description or prospectus before deciding whether to appoint an investment manager or to invest in a fund. Any views expressed herein are those of the author(s), are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may make different investment decisions for different clients. There are no guarantees regarding the achievement of investment objectives, target returns, portfolio construction, allocations or measurements such as alpha, tracking error, stock weightings and other information ratios. The views and strategies described may not be suitable for all investors. SSGA does not provide tax or legal advice. Prospective investors should consult with a tax or legal advisor before making any investment decision. Investing entails risks and there can be no assurance that SSGA will achieve profits or avoid incurring losses.
Performance quoted represents past performance, which is no guarantee of future results. Investment return and principal value will fluctuate, so you may have a gain or loss when shares are sold. Current performance may be higher or lower than that quoted.
Images of NYSE Group, Inc. are used with permission of NYSE Group, Inc. Neither NYSE Group, Inc. nor its affiliated companies sponsor, approve of or endorse the contents of this program. Neither NYSE Group, Inc. nor its affiliated companies recommend or make any representation as to possible benefits from any securities or investments.