Three reasons CITs are gaining in popularity

What is a CIT?

A collective investment trust (CIT) is a tax-exempt, pooled investment designed exclusively for use in ERISA-qualified retirement plans. Unlike mutual funds, which are offered by investment management firms, CITs can only be offered and managed by banks and trust companies.  

As you decide whether they might be suitable for a client’s investment lineup, consider the following three characteristics, which are helping to drive their popularity. 

1 CITs offer similar investment opportunities as mutual funds

When it comes to the way underlying investments are chosen and managed, there’s a lot of similarity between a CIT and a mutual fund. In fact, CITs and funds can have common strategies and mandates and, in cases where the entities that offer both options are part of the same company, they may share management teams.

CITs and mutual funds: similarities and differences

Just as with a mutual fund, you’ll want to let your plan’s investment strategy and offering documents guide you in weighing a CIT’s suitability for a plan lineup.

CITs can be used in various types of qualified retirement plans² and can cover a full spectrum of investment objectives. Three-quarters of the CIT assets held in defined contribution (DC) plans are in U.S. equity and target-date strategies. 

Which CITs gather the most DC plan assets?

Distribution of assets by strategy

Source: “The Cerulli Report: U.S. Defined Contribution Distribution 2022,” Cerulli Research, as of 12/21/21. CIT refers to collective investment trust. DC refers to defined contribution. TDF refers to target-date fund.

2 CITs can be relatively lower in cost

In general, asset-based fees for CITs may be lower than mutual fund institutional shares. There are a couple reasons for this.

Offered by banks and trust companies just for use in workplace retirement plans, CIT operations can be leaner than a mutual fund’s. A bank and/or trust company must exercise investment authority over a CIT, but may rely on the assistance of an affiliated or third-party subadvisor.³ In fact, if a CIT mirrors a mutual fund, the same investment team might manage it. This can create efficiencies.

Because CITs aren’t subject to U.S. Securities and Exchange Commission (SEC) regulation, they’re exempt from the registration, reporting, and broker-dealer marketing requirements that apply to mutual funds. And this, in turn, results in savings for the trust company or bank that offers the CIT—savings that can be passed along to plan sponsors and participants in the form of lower fees.

Although they’re generally exempt from SEC regulations, CITs aren’t free from oversight; rather, they’re subject to regulation by federal and state bank regulators, by the IRS, and under the U.S. Department of Labor’s rules for ERISA fiduciaries.

Fee structures for CITs are typically based on the services provided to clients and the types of assets being managed. Unlike mutual funds, CITs have the flexibility to negotiate fees; for example, plans of all sizes may benefit from pricing based on the aggregate investment of plans using the same intermediary or recordkeeping platform.

3 The CIT investing experience is really no different for participants

Some plan sponsors might assume that because CITs aren’t public investments and subject to SEC rules, they might introduce new risk or inconvenience for participants. In reality, the investing experience is very similar to what participants get with mutual funds.

For example:

• The trust companies and banks that offer CITs are often well-known financial entities—or owned by companies that are.
  
• The makeup of a CIT portfolio and the management team itself may be identical to its mutual fund equivalent.
  
• CITs provide for daily pricing, ready liquidity, and timely performance reporting—investment features that participants have come to rely on.
• These investments can fit seamlessly into the participant experience, including access and tracking through a plan website, the availability of fund fact sheets and other collateral, and daily crediting of transactions.

Given the trends, consider if CITs are suitable for your toolbox

Given the  risk of ignoring lower-cost investment options and the growing popularity of CITs, it’s important for plan professionals to be knowledgeable about these products—and have some well-researched options at your fingertips.

Ask your plan recordkeepers and DCIO contacts about collective investment trusts, including which offerings might be appropriate for your client base.

1 “The State of the Target Date Market,” Sway Research, 2023.  2 These include Section 401(a) plans, Section 457(b) governmental plans, Section 403(b)(7) custodial accounts, Section 403(b)(9) retirement income accounts, and Section 401(a)(24) governmental plans. 3 In all cases, the bank or trust company offering a CIT must maintain substantial investment authority.

For complete information about a particular investment option, please refer to the fund offering document/trust document. You should carefully consider the objectives, risks, charges, and expenses before investing. The fund offering document/trust document contain this and other important information about the investment option. Please read the fund offering document/trust document carefully before you invest or send money. The fund offering document/trust document may only be available in English.