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).